Automated exchange for trading derivative securities

ABSTRACT

An automated exchange is provided for matching incoming orders for the purchase or sale of financial instruments, such as options contracts, with previously received orders. The exchange allocates the matching of orders first to fill customer orders and then to fill professional orders on a pro rata basis. A primary market maker is given preference over other market professionals. Market professionals that enter larger orders into the book receive a proportionally larger portion of the incoming order. The exchange automatically maintains a minimum size by deriving orders for professionals across a range of prices when orders at the market price are exhausted. The exchange automatically derives orders for professionals to join with market-improving orders when the market-improving orders are less than the minimum market size.

RELATED APPLICATIONS

The present invention is disclosed in a provisional application filedunder 35 U.S.C.§111(b), U.S. Application No. 60/106,935, filed Nov. 3,1998. Priority is hereby claimed under 35 U.S.C.§119(e) for that earlierfiled provisional application.

FIELD OF THE INVENTION

This invention relates generally to markets for the exchange ofsecurities, and more particularly to an automated exchange for thetrading of options contracts, that equitably allocates trades amongmarket professionals and assures liquidity.

BACKGROUND OF THE INVENTION

The options market first developed in the 1970s. Since that time,options for the purchase and sale of listed stocks have tradeddomestically only on floor-based exchanges, for example, the AmericanStock Exchange (AMEX). The method of trading options contracts in thesefloor-based environments is known as an “open outcry” system becausetrading takes place through oral communications between marketprofessionals at a central location in open view of other marketprofessionals. In this system, an order is typically relayed out to atrader standing in a “pit.” The trader shouts out that he has receivedan order and waits until another trader or traders shouts back atwo-sided market (the prices at which they are willing to buy and sell aparticular option contract), then a trade results. In an effort topreserve this antiquated system of floor-based trading, the transitionto and use of computer-based technology on these exchanges has beenslow. Although some processes that take place on these floor-basedexchanges have been automated or partially automated, they are not fullyintegrated and, in fact, many processes continue to function manually.As a result, there are many problems with the existing floor-basedsystem that have caused large inefficiencies and inadequacies in orderhandling and price competition in the options market, and have harboredpotential for abuse and mistakes.

By way of background, several of the floor-based markets rely on theskills of market professionals, known as specialists, who areresponsible for maintaining an orderly market and providing liquidity.Specialists accept orders, establish prices for a particular series ofoptions and allocate trades among market professionals. In return foraccepting these responsibilities, specialists oftentimes are assuredminimum participation rights in the trading activity that occurs in thepit. As is discussed below, this participation right is not exercisedover the smaller-size public customer market orders that trade with thesingle display systems. Instead, it is up to a specialist to claim theminimum amount of trading through the orders that are routed into thepit for trade-by-trade execution.

Specialists are part of a larger class of market professionals, known asmarket makers, who like specialists, are responsible for maintainingliquidity in the market. Market makers fulfill this responsibility byensuring that there is always a two-sided market through calling outprices (quotations) at which they are both willing to buy (bid) and sell(offer) a particular option contract and honoring those quotations whentrading with incoming orders. In the traditional open outcry system,market makers call out these quotations each time an order is routedinto the trading pit. Over time, each of the existing options exchangeshas developed systems to track the best quotation. What generallyhappens is that market makers call out quotations which are manuallyentered into a system that tracks and displays the single best bid andbest offer for the entire trading pit at any given time. As the marketmakers continue to call out new quotations, the system is updated toreflect the current best bid and best offer. In their existing state,these quotation systems do not track or identify which market makercalled out the quote currently displayed or the number of contracts(size) for which the market maker is willing to honor at that quotation.As is discussed below, these systems simply display a single quotationfor the entire pit that is generally understood to be valid (firm) foronly smaller-sized orders, for example 10 contracts, and for onlycertain types of orders, for example public customer orders entered onan exchange for immediate execution at the existing market price (thebest bid or offer) known as “market orders.” The floor-based exchangesgenerally have procedures for the automatic execution and allocation ofthese smaller-sized public customer market orders at the displayedquotations through a rotation assignment of the orders among the pitmarket makers.

Execution through use of the displayed quotation and automaticallocation to market makers does provide a guaranteed market forincoming smaller-sized public customer market orders. However, thissystem does not provide an incentive for members to make quotations forsize larger than the minimum, i.e., 10 contracts from the above example.In fact, often these automatic allocation systems do not permit marketmakers to make quotations for larger size. Further, because the bid andoffer prices for these allocation systems are set by a single quotation,the existing best bid and best offer may not always accurately reflectthe desire of each and every market maker, which makes it difficult formarket makers to change the quotation to reflect changes in the market.If the market for the option becomes volatile, for example, when theprice of the underlying stock fluctuates or if a market maker simplychanges his opinion on what a fair price for that option should be,market makers risk being forced to trade at a disadvantageous pricedisplayed on the single quotation system.

On the other hand, market makers must trade at the displayed marketprice or else update the quoted price if they wish to improve themarket. However, members have no incentive to quote a price thatimproves the market, i.e. quote a higher bid or lower offer than thecurrent displayed market price, because these systems allocate publiccustomer market orders to market makers in turn through a rotationprocess. Therefore, to what extent an individual market maker is allowedto participate in a particular order is a matter of chance and whether amarket maker who quotes a better market is able capture the benefit ofhis quotation in a particular option series depends upon his location inthe allocation rotation.

The ability for a market maker to act independently and to make deepliquid markets is severely inhibited by these single quotationallocation systems. The inherent inadequacies in these single quotationsystems stem from the fact that individual market makers' quotations andsize are not tracked or identified. As well the size that market makersare willing to trade at the next best prices (prices lower than the bestdisplayed bid or higher than the best displayed offer) is not tracked oridentified. These deficiencies make it difficult to assess market depthand liquidity and ultimately impact that quality of the prices customersreceive for their orders. What is more, because no record of marketquotations exists beyond the single quotation system it is virtuallyimpossible to accurately recreate and document historical marketconditions.

As discussed above, these existing single quotation systems generallyprovide a guaranteed market at the currently displayed best bid or bestoffer only for incoming smaller-sized public customer market orders. Theexecution and allocation procedures, however, are not honored for ordersnot meeting this criteria. Instead, non-marketable orders where aparticular price is bid or offered (limit orders), orders above theminimum size, and orders placed by professionals (professional orders),for example, broker-dealers trading for firm accounts and market makerstrading from other options exchanges, frequently continue to be quotedon a case-by-case basis by the market makers in the pit. These orders,therefore, do not even receive the benefit of the single quoteallocation systems, which despite their shortcomings, at least afford anopportunity for quicker execution at guaranteed prices. In addition, inperiods of high volatility or order volume, or similar circumstances inthe trading of the underlying security, a procedure known as a fastmarket may be instituted. When a fast market exists, the displayedquotations are not honored and market professionals generally revert toquoting incoming orders one series at a time until the conditionultimately subsides.

When a limit order cannot be filled immediately either because the pricebid or offered is outside the market or because there is inadequate sizeto fill the order at the volume ordered, the order is placed on a“book.” A book, more accurately a limit book, is a record of outstandingpublic customer limit orders that can be matched against future incomingorders. Professional orders are usually not allowed on the limit book.At the existing options exchanges, these limit books may be maintainedin a manual and/or electronic format. The current systems, however,generally are not integrated with the single quotation systems. Becausethe systems stand apart, the best bid and best offer for quotations iscalculated separately from the best bid and best offer for the limitbook. Moreover, professional orders are not generally accounted for ineither of these two calculations. As a result, in instances where thelimit book matches or betters a displayed quotation, incoming marketorders are not traded automatically. In those cases, incomingsmaller-size customer market orders utilizing a display quotation systeminstead must be “kicked out” and announced to the trading pit in openoutcry or manually executed against the limit book.

Broadcast of orders on the floor on a case-by-case basis can create adisadvantage for parties wishing to place larger orders. First, tradingis not anonymous. Therefore, market makers in the trading pit are ableto determine to some extent the identity of the party placing the orderand, as a result, oftentimes condition what they are willing to quoteon, for example, whether the order is from a public customer or a marketprofessional. Second, the fact that an order for a larger number ofoptions contracts has been placed can have an effect on the price of theunderlying stock. Persons overhearing the order placed on the floormarket can “trade ahead”, that is, buy or sell the underlying stock inanticipation of the owner of the options contracts exercising itsoptions. Trading ahead violates market rules, however, because a largenumber of people are aware of orders placed on floor markets, effectivepolicing of parties that trade ahead is impractical.

Under the current infrastructure, there is little accountability amongstthe individual market makers to make two-sided markets with size andcontinuously call out quotations. The single quote display systems, onthe one hand, looks to the crowd and not individuals to maintain thequotations. The traditional open outcry process, on the other hand,provides market makers with the opportunity to react to whichever ordersthey want to respond and to determine how they want to respond. Forexample, with incoming orders not routed through the single quotedisplay systems, market makers often distinguish between public customerand professional orders and vary the quotations they are willing totrade at after learning of the order type, not before. What is more,market makers do not quote size for which they are willing to trade atthe next best prices (lower than the best bid and higher than the bestoffer) or make distinctions on what they are willing to trade with othermarket professionals at the next best prices.

Beyond the trading processes internal to each option exchange,additional considerations arise when an option is listed on multipleexchanges. In order to assure that an order in a multiply-listedcontract receives the best execution price, market professionals arecharged with the responsibility of checking the other exchanges'quotations for prices better that the exchange's best bid or best offerand with the responsibility of contacting the other exchange to verifythat the quotations are valid. If better quotation exists at anotherexchange, that exchange's market participants must either trade at thatprice or change (fade) the quotation. The incoming order is generallynot automatically processed and must addressed on a case-by-case basis.This entire process of checking other exchange quotations is dependentupon the originating exchange market professionals' personal efforts toverify the other markets' quotations each time an order comes into thetrading pit.

The increasing volume of trades in options contracts, as well as thespeed at which price information of underlying stocks is transmitted toconsumers, has increased the demand for faster trade execution intoday's market. In addition, volatility in the price of underlyingstocks that are the basis for options contracts place further pressureon exchanges to execute trades quickly and at an equitable price. Marketmakers on floor-based markets are limited in the speed at which they canreact to market fluctuations and respond with quotations. This limitedresponse speed leads to greater market volatility and lower liquiditybecause the market makers are less willing to risk trading large numbersof contracts where the price may not be optimal. The disjointed natureof the various manual, and sometimes automated, systems which take placeon floor-based exchanges cultivate these deficiencies and, again, makeit difficult to assess the true market depth and liquidity andultimately impact that quality of the prices.

SUMMARY OF THE INVENTION

It is an advantage of the invention to provide an automated system formatching previously entered orders and quotations with incoming ordersand quotations on an exchange for securities, which will improveliquidity and assure the fair handling of orders.

It is a further advantage of the invention to provide an automatedexchange for securities wherein an incoming order is filled firstagainst public customer orders and then filled against professionalorders and quotations on a pro rata basis based on the size of theprofessional order or quotation.

It is yet another advantage of the invention to provide an automatedexchange for the trading of securities wherein a primary market makeralso known as a specialist is given a relatively higher portion of thepro rata order volume, primary market maker being a market maker withadditional responsibilities toward maintaining an orderly market.

It is yet another advantage of the invention to provide an exchange thatautomatically moves the price of a market maker's quotation one or moretrading increments worse that the quotation price after the size of thequotation has been exhausted, such new quotation having a predeterminedsize that is dependent upon the price of the new quotation.

It is yet another advantage of the invention to provide an exchange thatautomatically guarantees a predetermined minimum number of contracts atthe market price by placing a derived order for a primary market makerat the market price so that the total size at that price will be atleast the predetermined minimum number of contracts.

It is another advantage of the invention to provide an automatedexchange for securities that employs an automated away market process toassure that orders eligible for away market protection are executed atprices better than or equal to away market prices.

It is another advantage of the invention to provide an automatedexchange for securities that employs an automated fast market process toreduce volatility in the market and assure that orders are executed atfair prices.

It is another advantage of the invention to provide an automatedexchange for securities that employs an automated opening process toassure that orders entered on an opening are executed at a fair priceand that opening quotations accurately reflect the market interests.

It is yet another advantage of the invention to provide an automatedexchange for securities that employs a block order process to assurethat larger-sized orders are executed at a fair price.

It is another advantage of the invention to provide an automatedexchange for securities. that employs a facilitation process to assurethat larger-sized orders are executed at a fair price while guaranteeingthat a minimum percentage of a larger-sized order is traded by themarket professional who entered the larger-sized order, after any publiccustomer orders at the best price or prices are executed.

It is another advantage of the invention to provide a quotation matchingprocess whereby bid quotation and ask quotations are not immediatelyexecuted to provide an opportunity for automatic quotations system toadjust their prices before trading with a quotation generated by afaster automatic quotation system.

It is yet another advantage of the invention to provide a processwhereby the size of a market maker's quotation may be automaticallyincreased when its has a quotation at the best price and the aggregatesize of the best price would fall below a minimum size, or elseautomatically lower the price of the quotation in the case of a bid andraise the price of the quotation in the case of an offer according toparameters established by the market maker.

It is another advantage of the invention to enable market makers toestablish parameters which limit the amount of a quotation that shouldbe made available to execute against different types of orders.

Broadly, an exchange for matching securities according to the inventionstores a plurality of orders from public customers and marketprofessionals, as well as quotations from market makers in a book memoryand automatically matches incoming orders and quotations with thosestored orders and quotations.

According to one option, orders stored in the book memory from publiccustomers at the best price are matched first and, when all storedpublic customer orders at the best price have been matched, thenprofessional orders and quotations are matched on a pro rata basis.

According to another option, where the size of an incoming order is lessthan a small order preference limit, the portion of the order notmatched with public customer orders in the book memory at the best priceis matched with a primary market maker if it has a quotation at the bestprice.

According to another option, incoming orders are preferentiallyallocated to the primary market maker by providing a minimum allocationpercentage to the primary market maker's quotations before matchingorders and quotations among other professionals.

According to another option, when an incoming order is received thatdoes not match with previously entered orders or quotations and improvesupon the best price, but has a size less than a minimum market size, theexchange automatically derives an order for a primary market maker tojoin the order improving the best price from at least the minimum marketsize

BRIEF DESCRIPTION OF THE DRAWINGS

Further characteristics, features, and advantages of the presentinvention will be apparent upon consideration of the following detaileddescription of the invention, taken in conjunction with the followingdrawings, and in which:

FIG. 1 is a block diagram illustrating an automatic exchange accordingto an embodiment of the invention interconnected with a plurality ofmarket makers, exchange members, and other entities;

FIG. 2 is a detailed block diagram illustrating the exchange of FIG. 1;

FIGS. 3 through 13 are flow charts showing processing by the exchange ofFIG. 1.

DETAILED DESCRIPTION

Embodiments of the invention will be described in terms of an automatedexchange market for stock options, options being contracts for thepurchase or sale of a listed security at a particular strike price to beexercised on a particular date in the future. The invention, however, isnot limited to the sale of options contracts and may also be applied toother financial instruments such as stocks, bonds, commodity futurescontracts, currency, and the like.

The embodiments will be described in terms of a market for a singleoption, for example a put for IBM Class A stock expiring on Jan. 15,1999 with a strike price of 140. It is to be understood that theexchange according to the invention simultaneously provides a market fora series of options for a number of underlying stocks across a range ofexercise dates and at a range of strike prices. The vast number ofoptions that can be traded makes the invention particularly advantageousover less automated systems because many of the routine decisions madeby professionals in charge of a series of options can be defined inadvance and applied automatically.

An automated exchange according to the invention is administered by abusiness entity, for example, the International Securities Exchange LLC(ISE) of New York, N.Y., which authorizes certain persons as members.The business entity may authorize different types of members orparticipants, such as a primary market maker (PMM) and one or morecompetitive market makers (CMMs) to enter quotations in particularclasses of options. While there is only one PMM for each class ofoptions traded on the exchange, there may be multiple PMM participantson the exchange, each trading different classes of options. The businessentity may also authorize PMMs and CMMs to place orders in optionsclasses traded on the exchange, as. well as one or more broker-dealersto enter orders as principal or agent in options classes traded on theexchange, which broker-dealers shall be referred to herein as electronicaccess members (“EAMs”).

Orders entered on behalf of registered broker-dealers, including PMMs,CMMs and EAMs, are referred to herein as professional orders. Ordersentered on behalf of market makers on competing exchanges 18 are aparticular type of professional order referred to herein as “FARMM”orders. Orders on behalf of any party that is not a registeredbroker-dealer are referred to as public customers orders.

It is to be understood that the names, types and arrangement ofparticipants and orders are used as examples for purposes ofillustration. It is to be understood that the particular arrangement ofparticipants and orders may be varied and remain within the scope of theinvention. According to one embodiment of the invention, three distincttype of order are defined, namely public customer orders, professionalorders and FARMM orders as defined above. Nevertheless, a greater orfewer number of order types may be defined. The embodiments describedherein conform to the rules imposed by a certain type of businessentity. It is to be understood that an exchange which conforms to adifferent set of rules is nevertheless within the scope of theinvention. Further, it is to be understood that the term “exchange” doesnot limit the use of the invention to an entity that is a registeredexchange, that is, the invention may be administered by other types ofbusiness entities, such as broker-dealers, associations or others.

FIG. 1 shows an exchange 1 according to an embodiment of the presentinvention connected with a number of entities. An order placed on theexchange 1 may be a limit order that specifies an order size, that is,an integral number of contracts, and a bid price or offer price.Alternatively, an order may not specify a bid price or an offer price,in which case the order is referred to as a market order. It isunderstood that a market order is to be executed at the best availableprice, which is the highest price in the case of a market order to selland the lowest price in the case of a market order to buy.

Professional orders and quotations in an options class are communicatedto the exchange 1 by the PMM 3, and one or more CMMs 5, 7. One or moreEAMs 9, 11 communicate public customer, professional and FARMM orders tothe exchange 1. According to one embodiment of the invention, PMMs andCMMs may only enter proprietary quotations and orders, that is they maynot enter orders as an agent on behalf of a public customer or anotherprofessional.

The exchange 1 is also connected with a reporting entity 19. Thereporting entity 19 may be, for example, the Options Price ReportingAuthority (OPRA), which collects price and size data for all optionstraded on exchanges in the United States and provides this data tosubscribers. The exchange 1 communicates the prices of each trade to thereporting entity 19. The exchange also communicates the best pricesavailable, that is the highest bid price and the lowest offer price inthe book memory 33 discussed below. The reporting entity 19 may alsoinclude the Consolidated Trading System/Consolidated Quoting System(CTS/CQS), which collects price data on underlying stock markets.According to one embodiment of the invention applied to the trading ofoptions, the exchange 1 collects data from the reporting entity 19 anduses this information in its automatic trade execution process,described below. Data from the reporting entity 19 is also used tomonitor prices of options on other markets 17, as well as that of stocksunderlying the options to, among other functions, assess whether a “fastmarket” condition exists, that is, whether the other exchanges haveindicated that due to the volume and/or price volatility of a security,certain of their normal trade execution rules will not apply.

The exchange 1 is also connected with a clearance entity 21. Theclearance entity may be, for example, The Options Clearing Corporation(OCC). The clearance entity 21 performs the transactions necessary toclear the trade, including guaranteeing payment to the seller andaccountability for the buyer.

Telecommunication links between the exchange and each of the entities3-21 can be made by any of a number of known electronic data exchangemechanisms. For example, the exchange 1 may communicate to outsideentities 3-21 via local area networks, wide area networks, directelectronic or optical cable connections, dial-up telephone connections,or a shared network connection including the Internet using wire andwireless based systems.

Data can be exchanged between the exchange 1 and entities 3-21 via dataterminals located at the entities 3-21. Data terminals may be any of anumber of known data processing machines, for example, computerworkstations, personal computers, minicomputers, mainframe computers,personal digital assistants, web TV boxes, and the like. Terminals atthe entities 3-21 include software capable of communication with theexchange 1 using a predetermined data format. According to oneembodiment of the invention, data is exchanged with the exchange 1 usingOMnet™ API software manufactured by OM Technology AB of Stockholm,Sweden. Data may also be communicated from members to the exchangethrough the use of third-party services 12 that connect to the exchange.According to the embodiment illustrated in FIG. 1, EAM 11 is connectedwith the exchange 1 via such a third party communication system 12. Thethird party communication system may be, for example, an independentorder routing and back office service provider.

The exchange 1 may be implemented on a general-purpose computer underthe control of a software program. According to one embodiment of theinvention, the exchange 1 is implemented on an Open VMS system runningthe OM Click Exchange™ software manufactured by OM Technology AB.Alternatively, the exchange 1 can be implemented on a network ofgeneral-purpose computers each under the control of a separate softwareprogram or on a system of interconnected parallel processors. Althoughcomplex, it is believed that suitable software for performing thevarious functions described herein can be designed and constructed bycomputer programmers of ordinary skill.

FIG. 2 shows the exchange 1 in detail. Connections between the exchange1 and entities 3-21 are made via a data interface 23. The data interface23 performs error checking, data compression, encryption and mediatesthe exchange of data between the exchange 1 and entities 3-21. Ordersand quotations from the PMM 3 and CMMs 5, 7, as well as orders enteredby EAMs 9, 11 are placed on the exchange 1 via the interface 23.

Order and quotation information received via the interface 23 from thePMM 3, CMMs 5, 7 and EAMs 9, 11 is sent to the order process 25. Theorder process 25 first checks to see if the order or quotation is validaccording to programmable parameters that reflect the particular tradingrules of the entity administrating the invention. For example, accordingto one embodiment of the invention, if the order were a market orderplaced by a professional the order would be rejected because tradingrules prohibit professional market orders.

The order process 25 checks whether a fast market condition exists and,if so, passes orders to the fast market process 37. The fast marketprocess 37 provides a mechanism to dampen volatility. If it isdetermined that the trading volume exceeds a certain amount or marketvolatility would lead to inequitable trades, the exchange 1 can beplaced in fast market mode with respect to one or more instruments bystoring a fast market parameter in the system memory 26. The fast marketprocess 37 introduces a delay between trades that is determined by theadministering entity and may be changed based upon the market conditionsso that the appropriate interval can be employed. The fast marketprocess 37 further determines an optimal price for executions based uponorders and quotes that accumulate during the delay, which will serve todampen price fluctuations and execute trades at equitable prices. Theexchange 1 automatically monitors price and volume data received fromthe reporting entity 19. When the primary market for the underlyingstock indicates a fast market, the exchange 1 automatically sets a fastmarket condition for a predetermined time interval. The fast marketprocess 37 is described in detail below.

The order process 25 varies depending upon whether the order is a publiccustomer order, professional order or FARMM order. Except in the case ofa FARMM order, discuss below, the order process 25 checks whether theincoming order can trade against orders and quotations in the bookmemory 33, that is, whether the terms of an order can be satisfied by apreviously entered order or quotation in the book memory 33. Forexample, if there is an order to sell at 3 in the book memory 33, anincoming market order to buy, or an incoming limit order to buy with astated price of 3, or higher can trade. If the incoming order can tradeand the order is a public customer order, the order process 25 checksthe price on the away market 17 as reported by the reporting entity 19to determine if there is a better price available. Should an away market17 have a better price for the incoming order, the order process 25sends the order to the away market process 28.

The away market process 28 either trades the public customer orderautomatically against the PMM 3 at the same price as the better price inthe away market 17 or else stores the order in the book memory 33 andalerts the PMM 3 to the order according to a set of predeterminedparameters stored in the system memory 26 by the PMM 3. The order isstored in the book memory 33, but is hidden, that is, the price of theorder is not communicated to the reporting entity 19. The hidden orderwill be executed if an incoming order or quotation can be matched withthe hidden order, the away market 17 no longer has a better price, orthe PMM chooses to execute the order.

Where the order process 25 determines that there is not a better pricein an away market 17, or where the order is a professional order, theincoming order is sent to the bid matching process 34 if it is an orderto buy and the offer matching process 36 if it is an order to sell. Thebid matching process 34 matches buy orders against orders and quotationsto sell that are stored in the book memory 33. The offer matchingprocess 36 matches incoming sell orders against orders and quotations tobuy stored in the book memory 33. In both the bid matching process 34and the offer matching process 36, public customer orders at the bestprice are executed in time priority before professional orders andquotations at the same price. After public customer orders in the bookmemory 33 are executed, the bid matching process 34 and the offermatching process 36 apply an algorithm that allocates the remaining sizeof an incoming order among the professional orders and quotations at thebest price. This trade matching algorithm is described in detail below.

Where the order process 25 determines that an incoming limit ordercannot trade against orders stored in the book memory 33, or if only aportion of the incoming order can trade, the order process 25 stores theincoming order or unexecuted portion thereof in the book memory 33unless the order contains an instruction that it should be deleted if itcannot trade with orders in the book memory 33. For example, if thehighest bid stored in the book memory 33 (the best bid) is 3 and thelowest offer stored in the book memory 33 (the best offer) is 4, anorder to sell with a stated price of 4 cannot trade. If the incominglimit order that cannot trade improves the market, that is if theincoming order is a limit order with a bid price higher than the bestbid stored in the book memory 33 or an offer price lower than the bestoffer stored in the book memory 33, and the size of the order is below aspecified number of contracts, the order process 25 sends the order tothe derive or trade process 32 if it is a public customer order, ordeletes the order if it is a professional order. The derive or tradeprocess 32 ensures that, when the market improving order is stored inthe book memory 33, there is at least a minimum market size at the newmarket price. Under one embodiment of the invention, market rulesrequire that there be at least 10 contracts available at the best priceat all times. Thus, if the size of the market improving order is lessthan 10 contracts, the derive or trade process 32 either supplements themarket-improving order with an order derived on behalf of the PMM 3 orelse trades the market-improving order against the PMM's account. Theorder process 25 also sends a public customer order to the derive ortrade process 32 if the aggregate size of the best price becomes lessthan the minimum market size. The derive or trade process 32 isdescribed in detail below.

According to one embodiment of the invention, there are three instanceswhere an incoming limit order that cannot trade is not stored in thebook memory 33. First, a limit order may contain special instructionsthat it should not be stored in the book memory 33. For example, if alimit order is designated as a fill-or-kill order, the order process 25will delete the incoming order unless the entire size of the order canbe traded against the orders and quotations in the book memory 33.Second, if a limit order is designated as an immediate-or-cancel order,the order process 25 will delete any portion of the incoming order thatcannot trade against the orders and quotations in the book memory 33.Finally, according to this embodiment, a professional limit order thatcannot trade at a price that is within two trading increments below thebest bid or above the best offer is deleted by the order process 25,that is, no portion of the professional limit order is traded.

If an order is a FARMM order, the order process 25 sends the order tothe FARMM order process 30. The FARMM order process 30 stores the orderin a separate memory process and generates a message to the PMM 3 andCMMs 5, 7 that a FARMM order has been received. The PMM 3 can determineto send the FARMM order to the bid matching process 34 or offer matchingprocess 36, or the PMM 3 can determine to execute the FARMM order.

The order process 25 sends quotations to the bid matching process 34 orthe offer matching process 36 if the quotation can trade with an orderon the book memory 33. If a quotation would match against a quotationstored in the book memory 33, the order process 25 sends the quotationto the quotation matching process 31. If a quotation cannot trade, theorder process 25 stores the quotation in the book memory 33. Thequotation matching process 31 will not immediately execute an incomingquotation with a quotation that is stored in the book memory 33. Rather,according to one embodiment of the invention, the exchange 1 stores aprogrammable parameter that indicates the amount of time that the bidmatching process 34 and the offer matching process 33 will wait beforematching an incoming quotation with a quotation stored in the bookmemory 33. The quotation matching process is described in detail below.

Quotations entered by a PMM 3 or CMM 7, 5 contain a size parameter tablewhich instructs the order process 25 the percentage of the size of aquotation and the absolute number of contracts that should be madeavailable to execute against professional orders or quotations, and thatpercentage of the size of a quotation and the absolute number ofcontracts that should be made available to execute against FARMM orders.For example, a PMM 3 that enters a quotation to buy 60 contracts at 4,can indicate in the quotation size parameter table that the lesser of50% of the size of the quotation or 20 contracts should be madeavailable to be executed against a professional order or quotation andthat only 25% or 35 contracts should be made available to be executedagainst FARMM orders. In this example, the PMM's quotation can beexecuted against at 4 by professional orders for a total of 20 contracts(the lesser of 50% of 60 and 20) and executed against at 4 by FARMMorders for a total of 15 contracts (the lesser of 25% of 60 and 35contracts). The PMM will never execute more than 30 contracts total at4, so that if the size of the quotation is reduced to 15, the PMM'squotation can not be executed against by any type of order for more than15 contracts. If the size available for execution against a professionalorder or quotation or the size available to execute against a FARMMorder is reduced to zero, the order process will initiation thetick-worse process 39 if a professional order or quotation or FARMMorder attempts to match at the quotation price.

The block order and facilitation process 35 is an optional process thatan EAM 9, 11 can choose to use when executing large-size orders. Thesize of an order eligible for the block order and facilitation processis variable and can be set by the entity administering the exchange 1.Block orders are sent by the order process 25 to the block order andfacilitation process 35. The block order and facilitation process 35sends a message containing certain information describing the order tothe PMM 3 and CMMs 5, 7, as well as to EAMs 9, 11 with proprietaryorders at the best price. The block order and facilitation process 35allows those participants that received the message to enter individualbids or offers against the block order in the form of anonymous messagesthat are stored in a separate memory function, that is, such messages donot interact with orders and quotations stored in the book memory 33 andare not part of the bid matching process 34 or offer matching process36. Because block trade information sent to participants does notinclude the entering broker or customer information, the party placingthe block trade maintains anonymity, and because the messages are notcommunicated outside of the system, the participants that respond withbids and offers maintain anonymity.

Parties receiving the block order information respond within a limitedtime period with bids and offer messages. At the expiration of the timeperiod, the block order and facilitation process 35 calculates the bestpossible execution price for the block order and allocates the blockorder among the responders, as well as orders and quotations stored inthe book memory 33, according to the algorithm contained in the bidmatching process 34 and offer matching process 36. Block orders mustcontain a stated price. A block order may be designated as afill-or-kill order, that is, a trade should take place only if theentire size of the order can be executed at the stated price of theorder or better. If no trade is possible at the stated price or better,or if there is insufficient volume to execute the entire size of anorder that is designated fill-or-kill, the block order and facilitationprocess 35 deletes the block order and any responses. If only a portionof a block order that is not designated fill-or-kill is executed, theblock order and facilitation process 35 deletes the unexecuted portionof the block order and any unexecuted responses.

A facilitation order is a block order that the entering EAM 9, 11 wishesto trade against its own proprietary order. Facilitation orders enteredinto the block order and facilitation process 35 are handled the same asblock orders as described above, except in the case of a facilitationorder, the block order and facilitation process 35 uses an algorithmthat allocates all or a portion of the facilitation order against theEAM 9, 11 that entered it. Further, in the case of a facilitation order,the order is always executed in full because the EAM 9, 11 entering theorder commits to executing any amount of the order that is not executedby other participants. The block and facilitation process 35 isdescribed in detail below.

Orders and quotations that have been executed are sent to the executetrade process 27. The execute trade process 27 instructs the orderprocess 25 to remove the matched order from the book memory 33, andsends a message to the participants that submitted the matched orders orquotations. The execute trade process 27 also sends trade information tothe clearance and reporting process 29. The clearance and reportingprocess 29 sends the executed trade information to the reporting entity19 and the clearance entity 21 via the interface 23.

The final two process in FIG. 2 are the tick-worse process 39 and thestep-up or tick-worse process 39, both of which apply to quotationsentered by a PMM 3 or CMMs 5, 7. The tick-worse process 39 automaticallychanges the price and size of a quotation in the book memory 33 when thesize of the quotation in the book memory 33 is reduced to zero. Thetick-worse process 39 determines the new price and size according toparameters entered by the PMM 3 or CMM 5, 7. These parameters are storedin the system memory 26 with respect to each quotation entered by a PMM3 or CMM 5, 7. The new quotation price is one or more trading incrementslower for a quotation to buy and one or more trading increments higherfor a quotation to sell. The step-up or tick-down process 38 increasesthe size of a quotation at the best price when the aggregate size of thebest price would be less than the minimum market size according toparameters entered by the PMM 3 or CMM 5, 7, or sends the quotation tothe tick-worse process 38. The tick-worse process 39 and the step-up ortick-down process 38 are described in detail below.

FIGS. 3(a) through 3(c) illustrating the trading process within theexchange 1 for a limit order. An order is received at step S1 by theinterface 23 and passed to the order process 25. At step S3 of FIG.3(a), the order process 25 determines whether the incoming order isvalid. If the incoming order is not valid, the order process 25 rejectsthe incoming order at step S5 and sends a message to the party placingthe incoming order indicating that the order was rejected.

If the order is valid, then the order process 25 determines at step S7whether the order is a block or a facilitation order. If the order iseither of these, the order process 25 determines at step S9 whether theexchange is in a fast market mode, and if it is, the order process 25rejects the incoming order at step S11 and sends a message to the partyplacing the incoming order. If the exchange is not in a fast marketmode, the block order and facilitation process 35 is initiated at stepS13.

If the incoming order is not a block order or a facilitation order, theorder process 25 determines at step S15 whether the order is a FARMMorder. If the order is a FARMM order, the order process 25 determines atstep S17 whether the exchange is in a fast market mode, and if it is,the order process 25 rejects the incoming order at step S19 and sends amessage to the party placing the incoming order. If the exchange is notin a fast market mode, the FARMM order process 30 is initiated at stepS21.

If the incoming order is not a FARMM order, the order process 25determines at step S23 whether the exchange is in a fast market mode,and if it is, the order is handled according to the fast market process37 at step S25. If the exchange is not in fast market mode, the orderprocess 25 determines at step S27 whether the incoming order is an orderto buy or to sell.

If the incoming order is an order to buy, the order process 25determines at step S29 of FIG. 3(b) whether the incoming order can tradewith the offer side of the book memory 33. If the order cannot trade atstep S29, the order process 25 determines at step S31(a) whether theorder would improve upon the best bid, that is, whether the price of theorder is higher than the highest order or quotation to buy stored in thebook memory 33, and if it is not, the order process 25 stores the orderin the book memory 33 at step S31(b). If the order would improve uponthe best offer, the order process 25 determines at step S31(c) whetherthe size of the order is equal to or greater than the minimum marketsize stored in the system memory 26, and if it is, stores the order inthe book memory 33 at step S31(d). If the order is less than the minimummarket size, the order process 25 determines at step S31(e) whether theorder is a public customer order, and if it is not, deletes the order atstep S31(f). If the order is a public customer order the order process25 sends the order to the derive or trade process 32 at step S31(g).

If the incoming order can trade with the offer side of the book memory33 at step S29, the order process 33 determines at step S33 whether theorder is a public customer order, and if it is not, the bid matchingprocess 34 is initiated at step S35. If the incoming order is a publiccustomer order, the order process 25 determines at step S37 whetherthere is a better offer in the. away market 17, and if there is not, thebid matching process 34 is initiated in step S36. If there is a betterprice in the away market at step S37, the order process 25 sends theorder to the away market process 28 at step S39. The order process 25will skip step S37 and send the order directly to the bid matchingprocess 34 if the away market process 28 has been disabled at theexchange.

If the incoming order is an order to sell at step S27, the order process25 determines at step S41 of FIG. 3(c) whether the incoming order cantrade with the bid side of the book memory 33. If the order cannot tradeat step S41, the order process 25 determines at step S43(a) whether theorder would improve upon the best offer, that is, whether the price ofthe order is lower than the lowest order or quotation stored in the bookmemory 33, and if it is not, the order process 25 stores the order inthe book memory 33 at step S43(b). If the order would improve upon thebest offer, the order process 25 determines at step S43(c) whether thesize of the order is equal to or greater than the minimum market sizestored in the system memory 26, and if it is, stores the order in thebook memory 33 at step S43(d). If the order is less than the minimummarket size, the order process 25 determines at step S43(e) whether theorder is a public customer order, and if it is not, deletes the order atstep S43(f). If the order is a public customer order the order process25 sends the order to the derive or trade process 32 at step S43(g).

If the incoming order can trade with the bid side of the book memory 33at step S41, the order process 33 determines at step S45 whether theorder is a public customer order, and if it is not, the offer matchingprocess 36 is initiated at step S47. If the incoming order is a publiccustomer order, the order process 25 determines at step S49 whetherthere is a better bid in the away market 17, and if there is not, theoffer matching process 36 is initiated in step S50. If there is a betterprice in the away market at step S49, the order process 25 sends theorder to the away market process 28 at step S51. The order process 25will skip step S49 and send the order directly to the offer matchingprocess 36 if the away market process 28 has been disabled at theexchange.

FIG. 3(d) illustrates the trading process within the exchange 1 for amarket order. A market order is received at step S100. The order process25 determines at step S100 whether the order is valid, and if it is not,rejects the order at step S102. If the order is valid, the order process25 determines at step S104 whether the exchange is in fast market mode,and if it is, sends the order to the fast market process 37 at stepS106. If the exchange is not in fast market mode, the order process 25determines at step S108 whether there is a better price in an awaymarket 17, and if there is, sends the order to the away market process28. If there is not a better price in an away market 17, the orderprocess 25 determines at step S112 whether the order is to buy or sell.If the market order is a sell order, the order process 25 sends theorder to the offer matching process 36 at step S114. If the market orderis a buy order, the order process 25 sends the order to the bid matchingprocess 34 at step S116. The order process 25 will skip step S108 andmove directly to step S112 if the away market process 28 has beendisabled by the exchange.

Trade Matching

The exchange 1 according the to the invention matches incoming orderswith orders and quotations stored in the book memory 33. The orderprocess 25 initiates the bid matching process 34 and the offer matchingprocess 36, which contain rules that give priority to public customerorders at the best price, then allocate any remaining part of anincoming order or quotation among the professional orders and quotationson a pro rata basis. Specifically, incoming orders that match a publiccustomer order on the book are traded first against the public customerorder. If more than one public customer order is on the book at the sameprice, priority is assigned on the basis of entry time and trades aredone on a first in, first serve basis. That is, public customer ordersreceived earliest are traded first.

Limit orders that cross over the best price on the book will trade atthe best price to the extent of the size on the book at the best price.For example, if the best order or quotation to buy in the book memory 33is 4 for a total size of 20, a limit order to sell 10 at a stated priceof 3½ will match at 4. Where the incoming order is greater than the sizeof the orders and quotations on the book at the best price, the bidmatching process 34 and the offer matching process 36 will, using thepriority rules discussed in the previous paragraph, first trade theincoming order against the orders and quotations at the best price andthen trade the balance of the incoming order against the orders andquotations on the book at the next worse price. The process willcontinue until there is no more volume left in the incoming order, orthere is no longer an order or quotation in the book memory 33 that canmatch the price of the incoming order. If there is still volume left inthe incoming order and all orders and quotations on the book that canmatch the incoming order have been filled, the remaining volume of theincoming order is placed in the book memory 33, and this order sets anew best price.

Where both public customer orders and professional orders and quotationsare at the best price the bid matching process 34 and offer matchingprocess 36 first fills the public customer orders. If the incoming orderis below a predetermined size, for example, 5 contracts, then afterpublic customer orders have been filled, the PMM 3 will tradeexclusively the remaining size of the order if it has a quotation in thebook memory 33 at the best price. When the incoming order is for morethan the predetermined PMM small order preference size, the bid matchingprocess 34 and the offer matching process 36 allocate the trade amongthe professional orders and quotations at the best price according to analgorithm stored in the system memory 26.

FIGS. 4(a)-4(b) illustrate an embodiment of bid matching according tothe invention FIGS. 5(a)-5(b) illustrate an embodiment of offer matchingaccording to the invention. The operation of bid and offer matching willbe described in terms of a number of examples of incoming orders madeagainst orders and quotations stored in the book memory 33. For theseexamples it is assumed that the incoming orders are not block orfacilitation orders and no fast market condition exists. Further, it isassumed that there are no better prices on away markets 17.

TABLE I BID OFFER CUS PRO #1 PMM Total Price ($) Price ($) Total CUS PRO#1 PMM 10 10 20 3 3½ 35 10  5 20 10 20 30 2½ 3¾ 10 10

Table I shows an example of a portion of the book stored in the bookmemory 33. As shown in Table I, a total of 20 contracts have been bid at3 and a total of 30 contracts have been bid at 2½. PRO #1, aprofessional for example, an EAM 9, 11 trading on its own account, hasentered an order to buy 10 contracts at 3 and the PMM 3 has placed aquotation to buy 10 contracts at 3. A public customer 13, 15 (CUS) hasentered an order to buy 10 contracts at 2½ and PRO #1 has entered anorder to buy 20 contracts at 2½. The best bid price is 3.

On the offer side of the book, a public customer has entered an order tosell 10 contracts at 3½. PRO #1 has placed an order to sell 5 contractsat 3½ and 10 contracts at 3¾. The PMM 3 has entered a quotation to sell20 contracts at 3½. The best offer price is 3½.

As a first example, assume that an incoming order to buy 4 contracts at3½ is sent to the bid matching process 34 by the order process 25. Thebid matching process 34 determines at step S150 of FIG. 4(a) that thereis a public customer order at the lowest offer. The bid matching process34 trades the incoming order to buy 4 contracts with the public customerorder in the book memory 33 at step S168. At step S170, the bid matchingprocess determines that all 4 contracts in the incoming order have bematched. The match between the incoming order and the customer order inthe book memory 33 is sent to the execute trade process 27 in step S172.

As a second example, assume the same book as shown in Table I and anorder to buy 30 contracts at 3½ is sent to the bid matching process 34.As shown in FIG. 4(a), the bid matching process 34 completes step S168as above, matching 10 contracts of the incoming order with the publiccustomer order to sell 10 contract at 3½. At step S170, however, the bidmatching process 34 determines that there are still 20 contracts of theincoming order remaining and therefore moves to step S152. At step S152,the bid matching process 34 determines that the original size of theincoming order was greater than the PMM small order preference size,which is assumed to be 5 contracts for the purpose of this example. Thebid matching process then applies the allocation algorithm asillustrated in FIG. 4(b).

FIG. 4(b) shows an allocation formula for matching incoming ordersagainst quotations and professional orders at the best price, i.e., thelowest offer. According to this example, steps S180, S184, and S188determine that there is one professional along with the PMM at the bestprice. According to one embodiment of the invention at step S190, thebalance of the incoming order of 20 contracts is allocated among the PPM3 and PRO#1 according to the following formula:

X%=max[60%, siz[pmm]/(siz[pmm]+siz[pro])]  Equation #1

where:

siz [pmm] is the size of the quotation for the PMM 3 at the marketprice; and

siz [pro] is the size of the order for the professional, PRO #1, at themarket price.

If X% would result in a fractional allocation, the number allocated isrounded up to the nearest whole number. Other allocation formulas arealso possible without departing from the scope of the invention. Forexample, a minimum percentage greater or smaller than 60% may beselected. Also, the allocations may not be a “straight-line” pro rataformula but may include weighting factors. According to Equation #1, thePMM 3 is entitled to trade 80% of the remaining 20 contracts in theincoming order, i.e., the maximum of 60% and (20/(20+5))=80%. Thus, 16of the remaining 20 contracts are traded against the PMM's quotation and4 are traded against PRO #1's order at step S190 of FIG. 4(b). The bidmatching process 34 determines at step S164 of FIG. 4(a) that the orderhas been completely filled and sends the matches to the execute tradeprocess 27.

As a third example, assume that the book memory 33 is as it appears inTable I and a limit order to sell 16 contracts at 3 is sent to the offermatching process 36 by the order process 25. The offer matching process36 determines at step S200 of FIG. 5(a) that there are no publiccustomer orders at the highest bid price of 3. The offer matchingprocess 36 determines at step S202 that the original size of theincoming order was greater than the PMM small order preference size,which is assumed to be 5 contracts for the purpose of this example, andmoves to apply the allocation algorithm. FIG. 5(b) contains a diagram ofthe same allocation formula discussed above in connection with the bidmatching process 34 as applied in the offer matching process 36. At stepS222 of FIG. 5(b), the offer matching process determines that the PMMhas a quotation at 3 and at steps S226 and S230, that there is one otherprofessional order or quotation, PRO #1, at the same price. The incomingorder is allocated according to Equation #1 in step S232. The PMM trades60% of the order of 16 contracts, rounded up to the next whole contract,or 10 contracts. PRO #1 trades the remaining 6contracts. In step S212 ofFIG. 5(a), the offer matching process 35 determines that the entireorder was matched and sends the matches to the execute trade process 27at step 5214.

TABLE II OFFER Price Total CUS PRO #1 PRO #2 PMM 2½ 50 10 20 20 2¼ 30 1010 10

Table II shows another example of the book. For clarity only the offerside of the book is shown. Two professionals, PRO #1 and PRO #2, haveplaced orders along with the PMM 3 quotation and a public customer orderto sell. Assume that the order for PRO #1 at 2½ was placed before theorder for PRO #2 at 2½ SO that PRO #1 has time priority at the lowestoffer of 2½. As a fourth example, assume that an incoming customer limitorder to buy 10 contracts at 2½ is enter on the exchange 1.

The bid matching process 34 proceeds as shown in FIGS. 4(a) and 4(b).The process moves through steps S150 and S152 shown in FIG. 4(a), andsteps S180, S184, S188 and S194, shown in FIG. 4(b) as described in thethird example discussed above, to determine that there are twoprofessional orders at 2½ along with the PMM's quotation. At step S196the incoming order is allocated among the PMM 3, PRO #1, and PRO #2.According to one embodiment, the following equation is used to allocatethe order among the PMM 3 and the two professionals:

X%=Max[40%, Siz[pmm]/(Siz[pmm]+Siz[pro])]  Equation #2

Where:

siz [pmm] is the size of offer of the PMM 3 at the market price; and

siz [pro] is the size of the combined orders of the two professionals.

If X% would result in a fractional allocation, the number allocated isrounded up to the nearest whole number. Other allocation formulas arepossible without departing from the scope of the invention. For example,a minimum percentage greater or smaller than 40% may be used. Further,the pro rata allocation can be modified by, for example, weightingfactors that favor PRO #1 or PRO #2. According to Equation 2, the PMM 3is entitled sell 40% of the 10 contracts against the incoming order, or4 contracts. The remainder of the order is filled by the professionals,PRO #1 and PRO #2 on a pro rata basis. Although PRO #1 has timepriority, PRO #2 has a greater size, so his share is computed first. PRO#2 has 20 out of the 30 contracts of the orders placed by the twoprofessionals at the lowest offer and is entitled to 66% of the 6remaining contracts, or 4 contracts. The remaining 2 contracts aretraded by PRO #1.

TABLE III BID CUS PRO #1 PRO #2 PRO #3 PMM TOTAL PRICE  3 20 20 10 10 633 10 20 30 2½

Table III shows yet another example of the bid side of the book storedin the book memory 33, showing that three professionals, PRO #1, PRO #2,and PRO #3, have placed orders to buy along with a public customer orderand the PMM 3 quotation at the highest bid price of 3. The threeprofessionals PRO #1, PRO #2 and PRO #3 are listed in order of timepriority.

As a fifth example, assume a public customer limit order to sell 49contracts at 3 is entered. The offer matching process 36 proceeds asshown in FIGS. 5(a) and 5(b). The offer matching process 36 determinesat step S200 that there is a public customer order at the highest bidand matches 3 contracts of the incoming order against the CUS order atstep S216. The offer matching process moves to step S218 and determinesthat there remains 46 contracts in the incoming order, then moves tostep S202 to determine that the original size of the order is greaterthan 5 contracts, which is the PMM small order preference size for thepurposes of this example. The offer matching process 36 then applies theallocation formula and completes steps S222, S226, S230 and S234 in FIG.5(b) as explained in previous examples, to determine that there are morethan two professionals with orders or quotations along with the PMM 3quotation at the highest bid price. Step S238 allocates the remaining 46contracts among the PMM 3 and the three professionals. According to oneembodiment, the order is allocated according to the following formula:

X%=Max[30%, Siz[pmm]/(Siz[pmm]+Siz[pro])]  Equation #3

Where:

siz [pmm] is the size of the bid of the PMM 3 at the market price; and

siz [pro] is the size of the combined orders of the three professionals.

If X% would result in a fractional allocation, the number allocated isrounded up to the nearest whole number. Other allocation formulas can beused. For example, a minimum percentage greater or smaller than 30% canbe used or weighting factors can be provided to adjust the allocationamong the professionals based. According to Equation 3, the PMM 3 isentitled to 14 contracts, however, the PMM's bid is for only 10contracts at a price 3. Therefore, the PMM 3 trades only 10 contracts at3 against the incoming order. The balance of 36 contracts are allocatedamong the three professionals on a pro rata basis. In this case, PRO #1and PRO #2 have the same size, which is greater than PRO #3. Because PRO#1 has time priority over PRO #2, PRO #1 gets matched first. PRO #1 has40% of the orders among the professionals (20/50) and is entitled to 15contracts, leaving 21 contracts. PRO #2 has now has the largest size and66% of the size at the highest bid (20/30) and is matched for 14contracts, leaving 7 contracts. PRO #3, the last remaining professional,trades the balance of 7 contracts.

The examples given here are by way of illustration only No limitation ofthe invention should be implied.

Tick-Worse Process

The tick-worse process 39 according to the present invention allows thePMM 3 and CMMs 5, 7, to specify a set of quotations that areautomatically entered when the size of a quotation in the book memory 33is reduced to zero. Each quotation placed by the PMM 3 and CMMs 5, 7 isassociated with a quotation table for moving quotations one or moretrading increments worse than the best price, a worse price being alower price than a previously entered quotation to buy and a higherprice than a previously entered quotation to sell. Table IV is anexample of such a quotation table. The quotation table specifiesvariable volumes at which the PMM 3 and CMMs 5, 7 are willing to tradeat successively lower bids or higher offers. Because this process isautomatic, continuous quotations are maintained in the book memory 33without a delay between an execution and the PMM 3 and CMMs 5, 7manually entering another quotation.

TABLE IV Initial Size 30 contracts 1-tick worse 10 contracts 2-ticksworse 30 contracts 3-ticks worse  0 contracts 4-ticks worse 60 contracts5-ticks worse 60 contracts 6-ticks worse 60 contracts 7-ticks worse 60contracts 8-ticks or more worse 100 contracts 

It is to be understood that the quotation table shown in Table IV is byway of example only. A limitless number of quotation tables may bespecified without departing from the scope of the invention. Further,each PMM 3 or CMM 3, 7 can specify a quotation table for each quotationentered.

In this example, the PMM 3 has placed an initial quotation for 30contracts shown in the first line of Table IV and has specified a rangeof quotation sizes to be quoted when the initial quotation is exhausted.The table is stored in the system memory 26 and is retrieved by thetick-worse process 39 when needed. The depth of the table and the numberof contracts for each tick level can be adjusted by the PMM 3. When theinitial quotation for 30 contracts, as shown in the first line of TableIV, is exhausted, the tick-worse process 39 automatically generates anew quotation for 10 contracts at a price one tick worse than the marketprice. If the initial order for 30 contracts were placed at a marketprice of 3, then after these contracts are traded, the tick-worseprocess 29 automatically generates a new quotation for 10 contracts at2{fraction (15/16)} (assuming that below 3 the minimum trading incrementis {fraction (1/16)}). When the market at the price one tick worsebecomes exhausted, the tick-worse process 39 enters a quotation for 30contracts at a price two ticks worse than the original quotation and soon.

TABLE V BID CUS PRO PMM TOTAL PRICE 3 30 33 3 2 15/16

Table V shows an example of the bid side of the book in which a publiccustomer has entered an order to buy 3 contracts at 3 and the PMM 3 hasentered a quotation to buy 30 contracts at 3. The PMM 3 has stored thetable shown in Table IV in the system memory 26. Assume that a marketorder is received offering to sell 40 contracts. The order is passed tothe offer matching process 36 as shown in FIGS. 5(a) and 5(b) aftercompleting all necessary steps in FIG. 3(d) to reach S114. After stepsS200 and S216 of FIG. 5(a), the incoming public customer order ismatched for 3 contracts with the public customer order in the bookmemory 33 at the highest bid price of 3, leaving 37 contracts of theincoming market order unmatched in step S218. After step S202, the offermatching process 36 applies the allocation formula according to FIG.5(b) and completes steps S222 and S226, matching the PMM's quotation for30 contracts at 3 in step S228, and leaving 7 contracts of the incomingmarket order unmatched.

Because the full size of the PMM's quotation at 3 has been exhausted,the tick-worse process 39 is initiated as illustrated in FIG. 6. Thetick-worse process 39 automatically retrieves a tick-worse value fromthe system memory 26 in step S301. The tick-worse value depends on thenumber of times the PMM 3 has been ticked down after placing thequotation with which the tick-worse table is associated. Here, sincethis is the first time the PMM 3 has been ticked down, a tick down valueof 10 contracts is retrieved based on the table shown in Table IV. ThePMM's quotation at 3 is deleted from the book memory 33 in step S302 anda new quotation for the PMM 3 is automatically entered in the bookmemory 33 at a price one tick worse than the deleted quotation. Thus, aquotation for 10 contracts at 2{fraction (15/16)} is placed for the PMM3 at step S303. At step S305 the process returns to step S212 in FIG.5(a) and the offer matching process 36 continues at step S200, only nowthe highest bid is 2{fraction (15/16)}. The process moves through stepsS202 and applies the allocation formula according to FIG. 5(b), matchingthe remaining 7 contracts against the PMM's new quotation at 2{fraction(15/16)} that was generated by the tick-worse process 39 in step S303above.

TABLE VI OFFER PRICE TOTAL CUS PRO #1 PMM 3½ 60 30 30 3⅝ 5 5

Table VI shows an example of the offer side of the book. As a furtherexample, assume that a market order to buy 75 contracts is entered.Assume also that both the PMM 3 and PRO #1, who is a CMM 5, 7 that hasentered a quotation, have each entered the same quotation table shown inTable IV along with their initial quotations of 30 contracts.

The bid matching process 34 proceeds through steps S150 and S152 shownin FIG. 4(a), as described in previous examples, and applies theallocation formula according to FIG. 4(b). Both of the quotations fromthe PMM 3 and PRO #1 are exhausted at 3½, leaving 15 contracts of themarket order unmatched. The tick-worse process 39 retrieves thetick-worse values for both the PMM 3 and PRO #1 in step S301 of FIG. 6,and deletes the quotations at 3½ from the book memory 33 in step S302.In step S303, the tick-worse process automatically enters new quotationsfor the PMM 3 and PRO #1 at the price of 3⅝ for 10 contracts each(assuming that above 3, the minimum trading increment is ⅛). At stepS305 the process returns to step S164 in FIG. 4(a) and the offermatching process 36 continues, only now the lowest offer is 3⅝. Theprocess moves to step S168 and matches 5 contracts against the publiccustomer order to sell at 3⅝, and then moves through step S152 to applythe allocation formula, completing steps S180, S184 and S188 to matchthe remaining 10 contracts in step S196 according to FIG. 4(b).

Step-Up or Tick-Worse Process

FIG. 7 illustrates the step-up or tick-worse process 38. The step-up ortick-worse process 38 is initiated when there is a PMM 3 or CMM 5, 7quotation at the best price and the size of the best price in the bookmemory 33 becomes less than the minimum market size set in the systemmemory 26. The PMM 3 or CMM 5, 7 sets a parameter Z of a certain numberof contracts with respect to each quotation entered. At step S310, thestep-up or tick-worse process 38 retrieves the Z parameter, and at stepS312, calculates Q, which is the difference between the minimum marketsize and the size of the quotation at the best price at step S312. Atstep S314 the step-up or tick-worse process 38 determines whether thereis sufficient size in the Z parameter, that is, whether Q is less thanor greater than Z. If Q is greater than Z, the step-up or tick-worseprocess 38 initiates the tick-worse process 39 at step S316. If Q isequal to or less than Z, the size of the quotation is increase by Q atstep S318, which results in the size of the quotation becoming equal tothe minimum market size. Z is then decreased by Q at step S320, and thenew value for Z is stored in the system memory 26 in step S322.

TABLE IX BID CUS PRO PMM TOTAL PRICE 10 10 3 10 20 30 2½

As another example of the step-up or tick-worse process 38, Table IXshows an example of the bid side of the book. Assume a market order tosell 6 contracts is entered. The exchange 1 trades all 6 contracts inthe market order against the PMM's quotation at 3 in the mannerdiscussed with reference to FIGS. 5(a) and (b). A total of 4 contractsat the market price of 3 remain in the PMM's quotation. Assuming aminimum market size of 10 contracts, the step-up or tick-worse process38 will either step-up the PMM's quotation to 10 contracts or initiatethe tick-worse process 39 as described above. At step S312 Q isdetermined to be 6 (10-4). Step S314 determines whether the PMM 3 willbe stepped up or ticked down by comparing Q with the Z. If Z=7 then,since Z is greater than Q, the PMM's quotation is stepped up by 6contracts at step S318, Z is reduced to 1 in step S320, and theresulting market has a total of 10 contracts at the price of 3. Theresulting book is as shown in Table X.

TABLE X BID CUS PRO PMM TOTAL PRICE 10 10 3 10 20 30 2½

If however, Z=5, then since Z is less than the step-up size of 6, andthe PMM 3 will be ticked-down according to the tick-worse process 39initiated in S316.

Derive or Trade Process

The exchange 1 according to one embodiment of the present inventionmaintains a minimum size at the best bid and best offer, referred toherein as X. The value of X is variable and may be change in the systemmemory 26. According to one embodiment of the invention, the minimummarket size X is 10 contracts. When an incoming public customer limitorder that cannot trade improves the market (that is, when an order tobuy at a price higher than the best bid in the book memory 33 or anoffer to sell at a price lower than the best offer in the book memory33) and the size of the order is less than 10 contracts, the orderprocess 25 sends the order to the derive or trade process 32 at stepS43(g) of FIG. 3(c) if it is an order to sell and at step S31(g) of FIG.3(b) if it is an order to buy. If an incoming professional order orquotation improves the best price for less than 10 contracts, it isdeleted according to steps S43(f) of FIG. 3(c) and S31(f) of FIG. 3(b).

The derive or trade process 32 will either will either automaticallymatch an incoming public customer order that improves the market forfewer than 10 contract at the order's stated price, or else derive anorder for the PMM 3 at the stated price at the order so that the size ofthe best price will be 10 contracts. Whether an order is automaticallytraded or whether an order is derived is determined by a parameterstored in the system memory 26. A variable Y, the number of contractsthe PMM 3 is willing to have derived based on how much an order improvesthe market is entered by the PMM 3. According to one embodiment, Y canbe determined using a matrix functionality shown in Table VII.

TABLE VII If improvement = {fraction (1/16)} then Y = 9 If improvement =⅛ then Y = 7 If improvement = {fraction (3/16)} then Y = 4 Ifimprovement = ¼ then Y = 2

The functionality of Table VII is based on the assumption that thefurther away a market improving order is from the PMM's quotation price,the more willing the PMM 3 will be to trade it rather than join it witha derived order. According to one embodiment of the invention, amarket-improving order is traded away or joined with a derived orderusing the following formula.

 If (X minus Siz[limit orders])>Y then trade against the public customerorder;

If (X minus Siz[limit orders])<=Y then derive (X minus Siz[limit order])for the PMM 3 at the new market price,

where X=minimum market size; and

Siz[limit orders]=total number of limit order contracts at the marketimproving price.

The PMM's derived order is only good as long as the public customerincoming order that caused it to be created remains active. If themarket-improving public customer limit order is canceled or traded infull, the derived order is removed. If the market-improving publiccustomer order is partially traded, the derived order may increase, orthe balance of the market-improving customer order may be executedautomatically. When new orders are placed on the book at the same priceas the PMM's derived order, these new orders reduce the derived ordersize to minimize the number of derived order contracts necessary tomaintain the minimum market size.

TABLE VIII BID OFFER Cust PRO PMM Total Price Price Total  3 10 30 433   3¼ 30 10 10 2¼ 3½ 20

Table VIII shows an example of bids and offers stored in the book memory33. Assume a public customer limit order to buy 2 contracts at 3⅛ isentered. Step S29 of the bid matching process 34 shown in FIG. 3(b)determines that this order cannot trade because there are no offers tosell at less than 3¼. Step S31(a) determines that this bid would improvethe market if it were entered on the book since the highest bid price iscurrently 3. Entering the order on the book at 3⅛ would improve themarket by raising the market bid price. After determining that the ordersize is less than the minimum market size (assumed to be 10 contracts)at step S31(c) and that the order is a public customer order at stepS31(e), the derive or trade process 32 is started at step S31(g).

The operation of the derive or trade process 32 is shown in FIG. 8. StepS331 determines the maximum derived order size, Y, allowed by the PMM 3from the matrix provided by the PMM 3 stored in the system memory 26.Since this bid improves the market by ⅛, from 3 to 3⅛, the value of Yfrom Table VII is 7. Step S333 determines that the difference betweenthe minimum market size, 10, and the incoming order 2 is, 10−2=8, whichis greater than Y=7. Step S335 automatically trades the incoming orderagainst the PMM 3 at 3⅛. The best bid price remains 3.

As a further example, assume the same book as in Table VIII. A publiccustomer order for 4 contracts at 3⅛ is entered. Now the derive or tradeprocess 32 at step S333 in FIG. 8 determines that the difference betweenthe minimum market, 10, and the order size 4 is, 10−4=6, which is lessthan Y=7. Step S337 derives an order for the PMM 3 at 3⅛ for 6 contractsto provide a minimum market of 10 contracts at the new price of 3⅛. Thepublic customer order at 3⅛ will always trade before the derived order.If the customer order for 4 contracts is executed in full, the derivedorder at 3⅛ will be deleted, and the book memory 33 will return to itsstate in Table VIII. If the public customer order is reduced by anexecution, for example, to 2 contracts, the derive or trade process 32will return to step S333 and determine that the difference between theminimum market, 10 and the remaining order size 2 is, 10−2=8, which isgreater than Y=7. The remaining portion of the order will be executedautomatically against the PMM 3 at step S335.

The determination of the maximum derived order size, Y, can be madeusing means other than the functionality shown in Table VII. Accordingto one embodiment of the invention, Y depends on the absolute marketprice as well as on the price improvement of the incoming order.

The derive or trade process 32 will also be initiated if the best pricebecome less than 10 contracts. For example, again assume the marketillustrated in Table VIII, if the PRO order is cancelled and the PMM 3moves its quotation to 2¼, the bid at 3 would be reduced to only thepublic customer order for 3 contracts. The derive or trade process 32would be initiated by the order process, and an order would be derivedfor 7 contracts in step S333 as described in the previous example.Moreover, if a professional order for fewer than 10 contracts became thebest bid in a similar manner to this example, the order would beautomatically deleted. The step-up or tick-worse process 38 would beinitiated if a quotation for fewer than 10 contracts were to be thebecome the best bid, as described above.

Match of an Away Market Price

According to an embodiment of the invention, prior to executing anincoming public customer order at the best price in the book memory 33,the order process 25 compares the best price in the book memory toprices quoted for the same option on the away market 17. If the price onthe exchange 1 is as good as or better than the price on the away market17, the trade is executed. If the price on the away market 17 is betterthan the best price on the exchange 1, the away market process 28 isinitiated.

The operation of the away market process 28 is illustrated in FIG. 9.The away market process 28 first determines the price difference betweenthe PMM's quotation in the book memory 33 and the away market price atstep S340. According to one embodiment of the invention, the away marketprocess 28 receives price information from the reporting entity 19. StepS342 retrieves the PMM's away market matching table from the systemmemory 26. Table XI shows an example of such a table.

TABLE XI If away market is better by PMM matches up to ?? contracts<=.0625 15 <=.1250 10 <=.1875 5 <=.2500 2 <=.3125 1 <=.3750 1 <=.4375 0

The away market matching table determines a matching size that is thenumber of contracts that the PMM 3 is willing to execute at the betterprice equal to the away market for a range of price differentialsbetween the PMM's quotation and the away market 17. According to oneembodiment of the invention, the away market matching table is arrangedso that the PMM 3 is more likely to change his price to execute a publiccustomer order at the better away market price where the pricedifferential between the PMM's quotation and the away market 17 issmall. Where a large price differential exists, the PMM 3 will onlytrade small orders or will decline to match automatically. At step S344the volume of the incoming order is compared with the maximum volume forthe price differential given in the away market matching table. If thevolume of the order is less than the volume of the order shown in theaway market matching table, then step S348 automatically trades theorder against the PMM 3 at the away market price. If the volume of theincoming order is greater than the volume given by the away marketmatching table, then step S346 alerts the PMM 3 of the pricedifferential between the exchange 1 and the away market 17. The PMM 3can then decide whether to trade the incoming order at the away marketprice.

If an order is not traded automatically by the PMM 3 in step S348, theorder is stored in the book memory 33, but is not displayed as the bestprice. Rather, the order is hidden, but remains available for execution.For example, if the best bid in the book memory 33 is 4 and the bestoffer is 4¼, and the best bid from another market is 4⅛, a publiccustomer order to sell at 4 that is stored at step S346 may be executedagainst an incoming market order or limit order to buy at 4¼ or higher.In this example, both the public customer order to sell at 4 and theorder to buy received a better price.

Fast Market Process

When the market for an options contract becomes highly volatile or whenthe rate at which orders are received becomes too great, it is possiblethat the best price in the book memory 33 will not accurately reflectthe true price of the market. In such situations a fast market can beinitiated by the entity administering the exchange 1 by setting a fastmarket parameter in the system memory 26. The exchange 1 also maymonitor information received from the reporting entity 19 andautomatically initiate a fast market condition is such a condition isindicated for the security underlying an option.

As shown in FIG. 3(a), the order process 25 checks whether a fast marketcondition exists at steps S9, S17 and S23 by checking the value of thefast market parameter stored in the system memory 26. If a fast marketcondition exists, the incoming order is rejected at step S11 if it is ablock order or a facilitation order, and at step S19 if it is a FARMMorder, otherwise the order is sent to the fast market process 37. Thefast market process 37 accumulates orders for a time period determinedby the value of the fast market parameter. At the end of this timeperiod, a trade is executed at a price calculated to clear a maximumnumber of orders at a single price. After the trade, incoming orders areonce again accumulated for the time period and again trade at the end ofthe time period. This process provides an equitable price for marketorders by preventing orders received within a short period of time frombeing traded at varying prices. The delay introduced by the fast marketprocess also serves to dampen price fluctuations. Table XII shows anexample of a range of delay time periods that can be set depending onthe degree of volatility in the fast market according to one embodimentof the invention. Depending on the level of price volatility and/ortrading volume, the fast market level can be adjusted to provide thedesired degree of damping.

TABLE XII Fast Market Delay Times Fast Market Level Delay 0 NormalMarket - no delay 1 20 seconds 2 30 seconds 3 40 seconds 4 50 seconds 560 seconds 6 ISE staff enters the number of seconds at the time the fastmarket is called

The operation of the fast market process 37 is illustrated in FIGS.10(a) through 10(d). Step S567 shown in FIG. 10(a) selects the best(highest) bid in the book memory 33 as the current bid. Step S569calculates the number of contracts that would trade at the current bid.Step S571 determines whether the current bid is equal to the PMM's bid.If not, step S573 selects the next lower bid and begins step S569 again.If the PMM's bid has been reached, step S571 moves the process to stepS577 in FIG. 10(b), which selects the best (lowest) offer in the bookmemory 33 as the current offer. Step S578 calculates the number ofcontracts that would trade at the current offer. Step S579 determineswhether the current offer is equal to the PMM's offer. If not, step S580selects the next higher bid and begins step S578 again. If the PMM'soffer has been reached, step S579 moves the process to step S585 in FIG.10(c).

If there only one price that maximizes the number of contracts that canbe traded, step S585 trades orders at that price. If both the currentbid and current offer prices will lead to the same maximum number ofcontracts traded, then step S589 determines whether the spread betweenthe current bid and offer prices is an even number of ticks. If it is,orders are traded at the average of the current bid and current offerprices at step S591. If the spread is not even in step S589, the processstores a variable N, which equals the number of ticks (i.e., tradingincrements) in the spread minus two, and moves to step S595. If thespread is one tick wide in step S593, the process determines whether theinstrument is a put option or a call option. If it is a put option, stepS600 trades the orders at the lower of the prices determined in S585. Ifit is a call option, step S599 trades the orders at the higher of theprices determined in Step S585. Where the process moves to step S602 inFIG. 10(d), it determines whether it is a call option or a put option.If it is a put option, orders are traded at the lower of the pricesdetermine in S585 plus N ticks in step S604, and if it is a calloptions, orders are traded at the higher price determined in S585 minusN ticks in step S606.

Where the process moves to step S602 in FIG. 10(d), it determineswhether it is a call option or a put option. If it is a put option,orders are traded at the lower of the prices determine in S585 minus Nticks in step S604, and if it is a call options, orders are traded atthe higher price determined in S585 minus N ticks in step S606.

Opening Process

The opening process 40 is initiated by the PMM 3 to trade orders andquotations accumulated when the exchange 1 is not executing trades,e.g., overnight. The opening process 40 employs the same process as thefast market process 37 described above and illustrated in FIGS. 10(a)through 10(d) with one modification. Prior to moving to steps S587 orS589 of FIG. 10(c), the opening process 40 determines whether therewould be any market or marketable limit order left unexecuted at themaximum price or prices. If there would not be, the opening process 40moves to steps S587 or S589, if the there would be unexecuted marketorders, the opening process moves back to step S567.

FIG. 12 illustrates how a PMM 3 initiates the opening process. In stepS610, the PMM sends a message to the exchange 1 requesting that theopening process 40 test whether the opening process 40 would result in asingle price where all market orders are executed as described above.The PMM 3 then instructs the exchange 1 to initiate the opening process40. If all of the series of an options class are able to complete theopening process 40, the opening of the options class is complete. Anyoptions series that could not complete the opening process 40 continuesto attempt to complete the process as described with reference to FIGS.10(a) through 10(d).

Block Order and Facilitation Process

The block order and facilitation process 35 is initiated in step S13 ofFIG. 3(a). FIGS. 11(a) through 11(c) illustrate the block order andfacilitation process 35 when an order is received in step S650. Theblock order and facilitation process 35 identifies in step S652 the PMMand CMMs assigned to the option from information stored in the systemmemory 26 and those participants with professional orders at the bestbid or best offer for the option. The block order and facilitationprocess 35 then sends a messages in step S654 to those participantsidentified in step S652 informing them that a block order orfacilitation order has been received. In the case of a block order, themessage only includes the information about the order that EAM 9, 11that entered the order determined should be disclosed. For example, theEAM 9, 11 could determine that the message should not containinformation regarding the size of the order or the price of the order orboth.

The participants that receive the message in step S654 are given Mseconds in which they can choose to respond to the message with bids andoffers in step S656. M is a preprogrammed parameter stored in the systemmemory 26 that may be varied as determined by the entity administeringthe exchange 1. At the end of M seconds, the block order andfacilitation process 35 determines in step S657 whether the order is ablock order or a facilitation order.

If the order is a block order, step S658 of FIG. 11(b) determineswhether a trade can take place, that is whether a block order to sellcan be matched with responses to buy and/or buy orders and quotations inthe book memory 33, and whether a block order to buy can be matched withresponses to sell and/or sell orders and quotations in the book memory33. If the block order can trade, step S662 sends buy orders to stepS664 and sell orders to step S668, where the execution price of theblock order is determined. If the order is a facilitation order, stepS680 determines whether the order is a buy order or a sell order, andsends buy orders to step S682 and sell orders to step S688, where theexecution price of the facilitation order is determined.

The execution price of a block order or facilitation order determined insteps S664 and S682 will be the price of the order unless the entiresize of the order can be executed at a lower price. The execution priceof a block order or facilitation order determined in steps S668 and S688will be the order price unless the entire size of the order can beexecuted at a higher price. If there are participants that are willingto sell at a price that is lower than the execution price of a blockorder or facilitation order to buy, such participants are executed atthe execution price in steps S665 and S684, and if there areparticipants willing to buy at prices higher than the execution price ofa block order or facilitation order to sell, such participants areexecuted at the execution price in steps S669 and S690. Public customerorders at the execution price are executed in steps S666, S670, S686 andS692.

The allocation algorithm described in FIG. 4(b) is applied at steps S667and S687 and the allocation algorithm described in FIG. 5(b) is appliedin steps S671 and S694. For the purposes of the allocation algorithmillustrated in FIGS. 4(b) and 5(b), responses received in step S656 aretreated the same as professional orders and quotations.

TABLE XIII OFFER IN BOOK MEMORY Price Total CUS PRO #1 PRO #2 PMM 2½ 6010 10 20 20 2¾ 10 10 10

Table XIII shows an example of the book memory 33. As an example of theblock order and facilitation process 35, a block order is entered by anEAM 9, 11 to buy 500 contracts at 2½. The EAM 9, 11 indicates whenentering the order that the size of the order should not be revealed,only that the block order is to buy at 2½. After completing steps S3, S7and S9 of FIG. 3(a), the block order is sent to the block order andfacilitation process 35 where the terms of the order are store in S650and a message is sent to the PMM 3, PRO #1, PRO #2 and any CMMsassociated with the options class in the system memory 26. PMM 3responds that it is willing to sell 250 contracts at 2½ and PRO #1responds that it is willing to sell 210 contracts at 2½. No otherresponses within 30 seconds are received, which is the assumed value ofM for the purposes of this example.

The block order and facilitation order process 35 determines that theorder is a block order in step S657, and in step S658 that the blockorder to buy at 2½ can match against responses to sell at 2½ as well asorders and quotations in the book memory 33.

TABLE XIV Number of Contracts to sell at 2½ Source  10 CUST Order inbook memory 270 PMM Quotation in book memory (20) Response to message(50) 220 PRO #1 Order in book memory (10) Response to message (10)  20PRO #1 Order in book memory

Table XIV shows that there is a total of 130 contracts available tomatch against the block order to buy. In step S662, it is determinedthat the order is to buy. In step S664, the price of the transaction isdetermined. In this example, the block order was to buy 500 at 2½. Sincethere are more than 500 contracts to match at 2½ and no responses ororders and quotation in the book memory 33 at a price lower than theblock order price, the execution price is determined to be 2½ and thereis nothing to execute at step S665. The public customer order for 10contracts is executed at step S666, and the block order and facilitationprocess 35 applies the allocation algorithm in step S667 according tothe same process illustrated in FIG. 4(b).

TABLE XV Number of contract Price of buy Source 4 10 Order in bookmemory 3⅞ 70 Quotation in book memory (20) Response to message (50) 3¾20 Cust Order in book memory (10) Response to message (10)

As an example of how the execution price is determined, assume that ablock order to sell 75 at 3¾ is entered. After completing steps S650through S657, Table XV represents the responses and order and quotationsto buy. The block order and facilitation process 35 determines that theblock order can match in step S658 and moves through step S662. Theexecution price is determined in step S668 as the highest price at whichthe entire order can be matched, which in this example is 3⅞. The orderin the book memory to buy at 4 will be executed at 3⅞ first at step S669There are no public customer orders at 3⅞, so the process moves throughstep S670 to apply in step S671 the allocation algorithm described aboveand illustrated in FIG. 5(b).

As illustrated in FIG. 11(c), the process for execution of facilitationorders trades a defined certain percentage of the original size of thefacilitation against to the EAM 9, 11 in steps S685 and S693 thatentered the facilitation order prior to applying the allocationalgorithms illustrated in FIGS. 4(b) and 5(b) in steps S687 and S696respectively. Further, after completing steps S687 and S696, anyremaining unexecuted portion of the facilitation order is traded againstthe EAM 9, 11 that entered the facilitation order. The percentage of thefacilitation order automatically executed against the EAM 9, 11 thatentered the facilitation is a value that is stored in the system memory26.

Quotation Matching Process

FIG. 13 illustrates the quotation matching process 31, which introducesa delay before automatically matching a bid and an ask quotation. Theidea is to prevent quotations from matching only because oneparticipant's automatic quotation system updates its quotation slightlymore quickly than another participant's automatic quotation system. Asan example, if there is a quotation in the book memory 33 to buy at 4and a CMM 7, 5 enters a quotation to sell at 4, the quotation matchingprocess marks the quotation to buy and the quotation to sell in stepS702 and then waits T seconds in step S704, T being a variable stored inthe system memory 26. In step S706, the process determines whether thereexists a bid and an offer that match, since during T quotations may havechanges. If there are no matching bids and offers, the marks from stepS702 are removed in step S708. If there are bids and offers that match,the process marks those quotations in step S710 and executes thematching quotations that have two or more marks at step S712. Theprocess then returns to step S704 to again wait T seconds.

The above embodiments are illustrative of the present invention. It isto be understood that the invention is not intended to be limited bythis disclosure, but rather is intended to cover various modificationsand equivalent arrangements included within the spirit and scope of theinvention, as will be apparent to a person of ordinary skill in the art.

I claim:
 1. An automated exchange for trading a financial instrumentwherein the trade may be one of a purchase of a quantity of theinstrument and a sale of a quantity of the instrument, the exchangecomprising: an interface for receiving an incoming order or quotation totrade the instrument, the incoming order or quotation having a sizeassociated therewith; book memory means for storing a plurality ofpreviously received orders or quotations to trade a correspondingplurality of quantities of the instrument, the previously receivedorders and quotations each having a size associated therewith and thepreviously received orders including public customer orders previouslyentered for public customers and professional orders or quotationspreviously entered for one or more professionals; system memory meansfor storing allocating parameters for allocating trades between theincoming order or quotation and the previously received orders andquotations; and processor means for allocating portions of the incomingorder or quotation among the plurality of previously received orders andquotations in the book memory means based on the allocating parametersin the system memory means, wherein the allocating parameters includeparameters for allocating a first portion of the incoming order orquotation against previously received customer orders and allocating aremaining portion of the incoming order or quotation preferentiallyagainst professional orders and quotations with larger size.
 2. Theexchange according to claim 1, wherein processor means further comprisesmeans for matching the remaining portion with professional orders orquotations in the book memory means on a pro rata basis.
 3. The exchangeaccording to claim 1, wherein the parameters stored in the system memoryfurther comprise a minimum allocation percentage and wherein theprocessor means further comprises means for matching the remainingportion based on a formula that allocates the minimum allocationpercentage of the remaining portion to the quotation identified with theprimary market maker.
 4. An automated exchange for trading a financialinstrument, wherein the trade may be one of a purchase a quantity of theinstrument and a sale of a quantity of the instrument, the exchangecomprising: an interface for receiving an incoming order or quotation totrade the instrument, the incoming order or quotation having a sizeassociated therewith; book memory means for storing a plurality ofpreviously received orders or quotations to trade a correspondingplurality of quantities of the instrument, the previously receivedorders and quotations each having a size associated therewith and thepreviously received orders including public customer orders previouslyentered for public customers and professional orders or quotationspreviously entered for one or more professionals; system memory meansfor storing allocating parameters for allocating trades between theincoming order or quotation and the previously received orders andquotations; processor means for allocating portions of the incomingorder among the plurality of previously received orders and quotationsin the book memory means based on the allocating parameters in thesystem memory means; means for matching a first portion of the incomingorder or quotation against customer orders and a remaining portion ofthe incoming order or quotation against professional orders andquotations, wherein the parameters stored in the system memory include aminimum allocation percentage and wherein the processor means furthercomprises means for matching the remaining portion based on a formulathat allocates the minimum allocation percentage of the remainingportion to the quotation identified with the primary market maker, andwherein the minimum allocation percentage is N% and the percentage ofthe remaining portion allocated to the order identified with the primarymarket maker is: X%=Max[N%, siz[pmm]/(siz[pmm]+siz[pro])] where siz[pmm]is the size of the order identified with the primary market maker, andsize[pro] is the sum of the sizes of the professional orders notidentified with the primary market maker.
 5. The exchange according toclaim 4, wherein the minimum allocation percentage, N%, is a function ofthe number of professionals having placed previously received orders orquotations.
 6. The exchange according to claim 1, wherein the financialinstrument is an options contract and wherein the size of an order orquotation is a number of contracts.
 7. The exchange according to claim6, further comprising a clearance entity linked to the processor meansfor executing a financial transaction to guarantee payment to a sellerof the matched order or quotation and to generate a number of newoptions contracts equal to the size of the matched order or quotationfor a purchaser.
 8. The exchange according to claim 6, furthercomprising a reporting entity linked with the processor means forreporting the size and a price of the matched orders and quotations. 9.The exchange according to claim 1, wherein the one or more professionalsinclude one or more broker-dealers.
 10. The exchange according to claim1, further comprising a primary market maker and one or more competitivemarket makers, the primary market maker and the competitive marketmakers being professionals and wherein the primary market maker and thecompetitive market makers enter orders or quotations independently. 11.The exchange according to claim 1, wherein the financial instrumentcomprises a series of instruments.
 12. An automated exchange for tradinga financial instrument, wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the exchange comprising: an interface for receiving an incoming order orquotation to trade the instrument, the incoming order or quotationhaving a size associated therewith; book memory means for storing aplurality of previously received orders or quotations to trade acorresponding plurality of quantities of the instrument, the previouslyreceived orders and quotations each having a size associated therewithand the previously received orders including public customer orderspreviously entered for public customers and professional orders orquotations previously entered for one or more professionals; systemmemory means for storing allocating parameters for allocating tradesbetween the incoming order or quotation and the previously receivedorders and quotations; processor means for allocating portions of theincoming order or quotation among the plurality of previously receivedorders and quotations in the book memory means based on the allocatingparameters in the system memory means; and means for identifying one ofthe previously received quotations with a primary market maker, whereinthe system memory means further comprises means for storing a smallorder preference limit, and wherein the processor means furthercomprises means for matching the incoming order or quotation with thepreviously received quotation identified with the primary market makerif the size of the incoming order or quotation is less than the smallorder preference limit.
 13. An automated exchange for trading afinancial instrument, wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the exchange comprising: an interface for receiving an incoming order orquotation to trade the instrument, the incoming order or quotationhaving a size associated therewith; book memory means for storing aplurality of previously received orders or quotations to trade acorresponding plurality of quantities of the instrument, the previouslyreceived orders and quotations each having a size associated therewithand the previously received orders including public customer orderspreviously entered for public customers and professional orders orquotations previously entered for one or more professionals; systemmemory means for storing allocating parameters for allocating tradesbetween the incoming order or quotation and the previously receivedorders and quotations; processor means for allocating portions of theincoming order or quotation among the plurality of previously receivedorders and quotations in the book memory means based on the allocatingparameters in the system memory means, wherein the book memory meansfurther comprises means for ranking the plurality of previously receivedorders and quotations in order of price from a best price to a worstprice, the best price being the highest price order or quotation forpurchasing the instrument or the lowest price order or quotation forselling the instrument; wherein the parameters stored in the systemmemory further comprise a quotation table associated with at least oneof the plurality of previously received quotations at the best price,and wherein the processor means further comprises means for storing agenerated quotation in the book memory means as a previously receivedquotation at a price one or more minimum trading increments worse thanthe best price with a size based on the quotation table when allpreviously received orders and quotations at the best price are matchedwith the incoming order or quotation.
 14. The exchange according toclaim 13, wherein the system memory means further comprises means foridentifying the quotation table stored in the system memory means with aprofessional quotation at the best price.
 15. The exchange according toclaim 13, wherein the quotation table includes a plurality of generatedquotation sizes associated with a respective plurality of prices.
 16. Anautomated exchange for trading a financial instrument, wherein the trademay be one of a purchase of a quantity of the instrument and a sale of aquantity of the instrument, the exchange comprising: an interface forreceiving an incoming order or quotation to trade the instrument, theincoming order or quotation having a size associated therewith; bookmemory means for storing a plurality of previously received orders orquotations to trade a corresponding plurality of quantities of theinstrument, the previously received orders and quotations each having asize associated therewith and the previously received orders includingpublic customer orders previously entered for public customers andprofessional orders or quotations previously entered for one or moreprofessionals; system memory means for storing allocating parameters forallocating trades between the incoming order or quotation and thepreviously received orders and quotations; and processor means forallocating portions of the incoming order or quotation among theplurality of previously received orders and quotations in the bookmemory means based on the allocating parameters in the system memorymeans, wherein the parameters stored in the system memory means furthercomprise a maximum derived order value and a minimum market size, and,wherein the processor means further comprises means for determining thata price for the incoming order or quotation is better than the bestprice, and, means for computing a difference between the size of theincoming order or quotation and the minimum market size, and, if thedifference is less than the maximum derived order value, and means forderiving an order at the better price and storing the incoming order orquotation and the derived order in the book memory means.
 17. Theexchange according to claim 16, wherein the processor means furthercomprises means for matching the incoming order or quotation at thebetter price with a derived order when the difference is greater thanthe maximum derived order value.
 18. The exchange according to claim 17,wherein the system memory means further comprises means for determiningthe maximum derived order value based on a price difference between thebest price and the better price.
 19. The exchange according to claim 18,wherein the means for determining the maximum derived order value is amatrix.
 20. The exchange according to claim 16, wherein the parametersstored in the system memory means include a step-up value, and whereinthe processor means includes means for deriving an order at the bestprice when the difference is less than the step-up value.
 21. Theexchange according to claim 20, wherein the processor means furthercomprises means for canceling the order or quotation at the best priceand means for deriving an order at a price one or more tradingincrements worse than the best price with a size based on the quotationtable when the difference is greater than the step-up value.
 22. Anautomated exchange for trading a financial instrument, wherein the trademay be one of a purchase of a quantity of the instrument and a sale of aquantity of the instrument, the exchange comprising: an interface forreceiving an incoming order or quotation to trade the instrument, theincoming order or quotation having a size associated therewith; bookmemory means for storing a plurality of previously received orders orquotations to trade a corresponding plurality of quantities of theinstrument, the previously received orders and quotations each having asize associated therewith and the previously received orders includingpublic customer orders previously entered for public customers andprofessional orders or quotations previously entered for one or moreprofessionals; system memory means for storing allocating parameters forallocating trades between the incoming order or quotation and thepreviously received orders and quotations; processor means forallocating portions of the incoming order or quotation among theplurality of previously received orders and quotations in the bookmemory means based on the allocating parameters in the system memorymeans; and away market querying means for determining an away marketprice for the instrument, and wherein the processor means determines abest price for the instrument and compares the best price with the awaymarket price, and, if the best price is as good or better than the awaymarket price, the processor means executes the trade.
 23. The exchangeaccording to claim 22, further comprising an away market process meansfor entering a matching quotation at the away market price if theprocessor means determines that the away market price is better than thebest price.
 24. The exchange according to claim 23, wherein the awaymarket process means computes a difference between the away market priceand the best price, and, depending on the difference, enters a quotationat the away market price if the size of the incoming order or quotationis less than or equal to a matching size.
 25. The exchange according toclaim 24, wherein the away market process means includes a matchingtable, the matching table including a plurality of price differences andmatching sizes.
 26. The exchange according to claim 25, wherein thematching table includes larger matching sizes corresponding to smallerdifferences.
 27. The exchange according to claim 23, further comprisingalerting means for generating an alert signal if the size is greaterthan the matching size.
 28. An automated exchange for trading afinancial instrument, wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the exchange comprising: an interface for receiving an incoming order orquotation to trade the instrument, the incoming order or quotationhaving a size associated therewith; book memory means for storing aplurality of previously received orders or quotations to trade acorresponding plurality of quantities of the instrument, the previouslyreceived orders and quotations each having a size associated therewithand the previously received orders including public customer orderspreviously entered for public customers and professional orders orquotations previously entered for one or more professionals; systemmemory means for storing allocating parameters for allocating tradesbetween the incoming order or quotation and the previously receivedorders and quotations; processor means for allocating portions of theincoming order or quotation among the plurality of previously receivedorders and quotations in the book memory means based on the allocatingparameters in the system memory means; fast market process means forintroducing a delay prior to the trade for determining the price for thetrade, wherein the fast market process means comprises: fast marketdetecting means for detecting a market volatility and for determining afast market condition based on that volatility; delay means for causingthe processor means to pause a predetermined period of time prior toallocating the incoming order or quotation; accumulating means foraccumulating a plurality of incoming orders and quotations during thepredetermined period of time; and price determining means fordetermining a price for trades of the accumulated orders and quotations.29. The exchange according to claim 28, wherein the fast marketdetecting means select one of a plurality of fast market levels based onthe market volatility and wherein the delay means selects one of acorresponding plurality of periods of time associated with the pluralityof fast market levels.
 30. The exchange according to claim 28, whereinthe price determining means comprises: price selecting means forselecting a current price; order clearance testing means for determiningif a trade at the current price would clear all market orders of theplurality of accumulated orders and quotations; and next price selectingmeans for selecting a next worse price as the current price.
 31. Theexchange according to claim 30, wherein the price determining meansfinds an offer price and a bid price as current prices and furthercomprises trade price determining means for selecting among the bidprice and offer price based on a number of accumulated orders andquotations that would be cleared.
 32. The exchange according to claim31, further comprising tie breaking means for selecting a trade pricewhen the number of accumulated orders and quotations that would becleared is the same for the bid price and offer price.
 33. The exchangeaccording to claim 32, wherein the tie breaking means determines thetrade price based on a price movement of a underlying stock.
 34. Theexchange according to claim 33, wherein the tie breaking means selectsthe trade price based on a current date.
 35. A process for trading afinancial instrument on an automated exchange wherein the trade may beone of a purchase of a quantity of the instrument and a sale of aquantity of the instrument, the process comprising: storing a publiccustomer order to trade the instrument in a book memory, the publiccustomer order having a size; storing a plurality of professional ordersor quotations entered for one or more professionals to trade theinstrument in the book memory, the professional orders or quotationshaving a respective plurality of sizes; establishing a best price forthe instrument; establishing an allocating parameter; receiving anincoming order or quotation for the purchase or sale of the instrument,the incoming order or quotation having a size associated therewith;first matching a first portion of the incoming order or quotationagainst the public customer order stored in the book memory based on theallocating parameter; and second matching a remaining portion of theincoming order or quotation preferentially against professional ordersand quotations with larger size based on the allocating parameter. 36.The process according to claim 35, wherein the step of second matchingfurther comprises allocating the remaining portion among the pluralityof professional orders and quotations on a pro rata basis.
 37. Theprocess according to claim 35, wherein the professional orders andquotations are stored by one or more broker-dealers.
 38. The processaccording to claim 35, wherein the professional orders and quotationsare stored by a primary market maker and one or more competitive marketmakers, the primary market maker and the competitive market makers beingprofessionals and wherein the primary market maker and the competitivemarket makers enter orders or quotations independently.
 39. The processaccording to claim 35, wherein the financial instrument comprises aseries of instruments.
 40. A process for trading a financial instrumenton an automated exchange wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the process comprising: storing a public customer order to trade theinstrument in a book memory, the public customer order having a size;storing a plurality of professional orders or quotations entered for oneor more professionals to trade the instrument in the book memory, theprofessional orders or quotations having a respective plurality ofsizes; establishing a best price for the instrument; establishing anallocating parameter; receiving an incoming order or quotation for thepurchase or sale of the instrument, the incoming order or quotationhaving a size associated therewith; matching the incoming order orquotation against the orders and quotations stored in the book memorybased on the allocating parameter; identifying one of the professionalquotations with a primary market maker, wherein the allocating parameterincludes a small order preference limit, and wherein the step ofmatching further comprises: determining that the size of the incomingorder or quotation is less than or equal to the small order preferencelimit; and matching the incoming order or quotation with theprofessional quotation identified with the primary market maker.
 41. Theprocess according to claim 40, wherein the allocating parameter includesa minimum allocation percentage and wherein the step of matching furthercomprises: determining an allocation formula based on the minimumallocation percentage; and matching the incoming order or quotation withthe professional orders and quotations based on the allocation formula.42. A process for trading a financial instrument on an automaticexchange wherein the trade may be one of a purchase of a quantity of theinstrument and a sale of a quantity of the instrument, the processcomprising: storing a public customer order to trade the instrument in abook memory, the public customer order having a size; storing aplurality of professional orders or quotations to trade the instrumentin the book memory, the professional orders or quotations having arespective plurality of sizes; establishing a best price for theinstrument; establishing an allocating parameter, wherein the allocatingparameter includes a small order preference limit and a minimumallocation percentage; identifying one of the professional quotationswith a primary market maker; receiving an incoming order or quotationfor the purchase or sale of the instrument, the incoming order orquotation having a size associated therewith; first matching a firstportion of the incoming order or quotation with the customer order;clearing the customer order matched with the first portion from the bookmemory; determining that the size of the incoming order is less than orequal to the small order preference limit; determining an allocationformula based on the minimum allocation percentage; and matching theremaining portion with the professional orders and quotations based onthe allocation formula, wherein the minimum allocation percentage is N%and the allocation formula is: X%=Max[N%, siz[pmm]/(siz[pmm]+siz[pro])],where siz[pmm] is the size of the order identified with the primarymarket maker, and siz[pro] is a sum of order sizes identified with theprofessionals other than the primary marker maker.
 43. The processaccording to claim 35, wherein the financial instrument is an optionscontract and wherein a size of an order or quotation is a number ofcontracts.
 44. The process according to claim 43, further comprising:transmitting a message to a clearance entity reporting a price and sizeof the order or quotation matched in the steps of first and secondmatching; executing a financial transaction by the clearance entity toguarantee payment to a seller of the matched order or quotation; andgenerating a number of new options contracts by the clearance entityequal to the size of the matched order or quotation for a purchaser. 45.The process according to claim 43, further comprising transmitting amessage to a reporting entity communicating the size and price of theorder or quotation matched in the steps of first and second matching.46. A process for trading a financial instrument on an automatedexchange wherein the trade may be one of a purchase of a quantity of theinstrument and a sale of a quantity of the instrument, the processcomprising: storing a public customer order to trade the instrument in abook memory, the public customer order having a size; storing aplurality of professional orders or quotations entered for one or moreprofessionals to trade the instrument in the book memory, theprofessional orders or quotations having a respective plurality ofsizes; establishing a best price for the instrument; establishing anallocating parameter; receiving an incoming order or quotation for thepurchase or sale of the instrument, the incoming order or quotationhaving a size associated therewith; establishing a quotation table;determining that orders stored in the book memory at the best price havebeen exhausted; and storing a generated quotation in the book memory ata price one or more trading increments worse than the best price with asize based on the quotation table.
 47. The process according to claim46, further comprising identifying the quotation table with a quotationstored in the book memory.
 48. The process according to claim 47,wherein the quotation table includes a plurality of successive prices.49. A process for trading a financial instrument on an automatedexchange wherein the trade may be one of a purchase of a quantity of theinstrument and a sale of a quantity of the instrument, the processcomprising: storing a public customer order to trade the instrument in abook memory, the public customer order having a size; storing aplurality of professional orders or quotations entered for one or moreprofessionals to trade the instrument in the book memory, theprofessional orders or quotations having a respective plurality ofsizes; establishing a best price for the instrument; establishing anallocating parameter; receiving an incoming order or quotation for thepurchase or sale of the instrument, the incoming order or quotationhaving a size associated therewith; matching the incoming order orquotation against the orders and quotations stored in the book memorybased on the allocating parameter, wherein the allocating parameterincludes a maximum derived order value; determining that a price of theincoming order or quotation is better than the best price; determiningthat a size of the incoming order or quotation is less than a minimummarket size; calculating a difference between the size of the incomingorder or quotation and the minimum market size; determining that thedifference is less than the maximum derived order value; and storing aquotation in the book memory at the better price with a size equal tothe difference.
 50. The process according to claim 49, furthercomprising: determining that the difference is greater than the maximumderived order value; and matching the incoming order or quotation with aprimary market maker quotation at the better price.
 51. The processaccording to claim 49, further comprising determining the maximumderived order value based on a price difference between the best priceand the better price.
 52. The process according to claim 51, wherein thestep of determining the maximum derived order value further comprisesretrieving a matrix.
 53. A process for trading a financial instrument onan automated exchange wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the process comprising: storing a public customer order to trade theinstrument in a book memory, the public customer order having a size;storing a plurality of professional orders or quotations entered for oneor more professionals to trade the instrument in the book memory, theprofessional orders or quotations having a respective plurality ofsizes; establishing a best price for the instrument; establishing anallocating parameter; receiving an incoming order or quotation for thepurchase or sale of the instrument, the incoming order or quotationhaving a size associated therewith; matching the incoming order orquotation against the orders and quotations stored in the book memorybased on the allocating parameter, wherein the allocating parameterincludes a step-up value and a minimum market size; determining that asize of orders and quotations at the best price is less than the minimummarket size; calculating a difference between the size of orders andquotations at the best price and the minimum market size; determiningthat the difference is less than the step-up value; and deriving anorder.
 54. The process according to claim 53, wherein the size of thederived order equals the difference.
 55. The process according to claim54, wherein the allocating parameter includes a quotation table, andwherein the process further comprises: determining that the differenceis greater than the step-up value; canceling a professional order orquotation at the best price; and deriving an order for a professional ata price one or more trading increments worse than the best price with asize determined from the quotation table.
 56. A process for trading afinancial instrument on an automated exchange wherein the trade may beone of a purchase of a quantity of the instrument and a sale of aquantity of the instrument, the process comprising: storing a publiccustomer order to trade the instrument in a book memory, the publiccustomer order having a size; storing a plurality of professional ordersor quotations entered for one or more professionals to trade theinstrument in the book memory, the professional orders or quotationshaving a respective plurality of sizes; establishing a best price forthe instrument; establishing an allocating parameter; receiving anincoming order or quotation for the purchase or sale of the instrument,the incoming order or quotation having a size associated therewith;matching the incoming order or quotation against the orders andquotations stored in the book memory based on the allocating parameter;querying an away market to determine an away market price; comparing thebest price with the away market price; and, if the best market price isas good or better than the away market price, executing the step ofmatching.
 57. The process according to claim 56, wherein, if the step ofcomparing determines that the away market price is better than the bestprice, further comprising: computing a price difference between the bestprice and the away market price; determining a size of the trade;determining a matching size based on the difference; and matching theincoming order or quotation at the away market price if the size of theincoming order or quotation is less than the matching size.
 58. Theprocess according to claim 57, wherein the step of querying furthercomprises receiving market price information from a reporting entity.59. The process according to claim 58, wherein the step of determiningthe matching size further comprises reading an away market matchingtable, the matching table including a plurality of matching sizesassociated with a corresponding plurality of price differences.
 60. Theprocess according to claim 59, wherein smaller price differences in thematching table are associated with larger matching sizes.
 61. Theprocess according to claim 57, wherein if the size of the incoming orderor quotation is greater than the matching size, further comprisinggenerating an alert signal.
 62. A process for trading a financialinstrument on an automated exchange wherein the trade may be one of apurchase of a quantity of the instrument and a sale of a quantity of theinstrument, the process comprising: storing a public customer order totrade the instrument in a book memory, the public customer order havinga size; storing a plurality of professional orders or quotations enteredfor one or more professionals to trade the instrument in the bookmemory, the professional orders or quotations having a respectiveplurality of sizes; establishing a best price for the instrument;establishing an allocating parameter; receiving an incoming order orquotation for the purchase or sale of the instrument, the incoming orderor quotation having a size associated therewith; matching the incomingorder or quotation against the orders and quotations stored in the bookmemory based on the allocating parameter; determining that a fast marketcondition exists; accumulating a plurality of incoming orders andquotations for a predetermined period of time; determining a trade pricefor trades of the accumulated orders and quotations; and matching theaccumulated orders and quotations at the determined trade price afterthe predetermined period of time.
 63. The process according to claim 62,further comprising: establishing a plurality of fast market levels;establishing a plurality of predetermined periods of time correspondingto the fast market levels; determining which fast market levelcorresponds to the fast market condition; and accumulating incomingorders and quotations for a period of time corresponding to thedetermined fast market level.
 64. The process according to claim 62,wherein the step of determining the trade price comprises: determiningwhich of the accumulated orders are market orders; determining that thepredetermined period of time has expired; bid selecting a highest bidprice of the orders on the book that are bids as a current bid price;bid predicting whether all the market orders that are bids will trade atthe current bid price; if all market orders that are bids will not tradeat the current bid price, selecting a next worse price as the currentbid price and repeating the steps of bid predicting and bid selectinguntil the current bid price equals a primary market maker bid price;offer selecting a lowest offer price of the orders on the book that areoffers as the current offer price; offer predicting whether all themarket orders that are offers will trade at the current offer price; ifall the market orders that are offers will not trade at the currentoffer price, selecting a next worse price as the current offer price andrepeating the steps of offer predicting and offer selecting until thecurrent offer price equals a primary market maker offer price; andselecting from among the current bid price and current offer prices atrade price that maximizes a number of orders traded.
 65. The methodaccording to claim 64, further comprising: determining that the currentoffer price and current bid price will result in the same number oforders traded; determining that a number of trading increments betweenthe current offer price and the current bid price is an even number; andestablishing the trade price as the average of the current bid price andcurrent offer price.
 66. The process according to claim 64, wherein thefinancial instrument is an option contract and further comprising:determining that the number of trading increments between the currentbid price and current offer price is one; determining a price movementof an underlying stock; if the stock movement is upward, selecting thecurrent offer price as the trade price for call options and the currentbid price as the trade price for put options; and if the stock movementis downward, selecting the current bid price as the trade price for calloptions and selecting the current offer price as the trade price for putoptions.
 67. The process according to claim 66, further comprising:determining that the stock movement is neither upward nor downward; andselecting the trade price based on a current date.
 68. A process fortrading option contracts on an automatic exchange wherein the trade maybe one of a purchase of a quantity of the contracts and a sale of aquantity of the contracts, the process comprising: storing a publiccustomer order to trade the contracts in a book memory, the publiccustomer order having a size; storing a plurality of professional ordersor quotations to trade the contracts in the book memory, theprofessional orders or quotations having a respective plurality ofsizes; establishing a best price for the contracts; establishing anallocating parameter; receiving an incoming order or quotation for thepurchase or sale of the contracts, the incoming order or quotationhaving a size associated therewith; determining that a fast marketcondition exists; accumulating a plurality of incoming orders andquotations for a predetermined period of time; determining which of theaccumulated orders are market orders; determining that the predeterminedperiod of time has expired; bid selecting a highest bid price of theorders on the book that are bids as a current bid price; bid predictingwhether all the market orders that are bids will trade at the currentbid price; if all market orders that are bids will not trade at thecurrent bid price, selecting a next worse price as the current bid priceand repeating the steps of bid predicting and bid selecting until thecurrent bid price equals a primary market maker bid price; offerselecting a lowest offer price of the orders on the book that are offersas the current offer price; offer predicting whether all the marketorders that are offers will trade at the current offer price; if all themarket orders that are offers will not trade at the current offer price,selecting a next worse price as the current offer price and repeatingthe steps of offer predicting and offer selecting until the currentoffer price equals a primary market maker offer price; determining thenumber of trading increments between the current bid price and thecurrent offer price is greater than one; calculating a value, N, whichis the number of trading increments between the current bid price andthe current offer price minus two; if the stock movement is upward,selecting the current offer price minus N trading increments as thetrade price for call options, and the current bid price plus N tradingincrements as the trade price for put options; and if the stock movementis downward, selecting the current bid price plus N trading incrementsas the trade price for call options and the current offer price minus Ntrading increments as the trade price for put options; and matching theincoming order or quotation against the orders and quotations stored inthe book memory based on the allocating parameter.
 69. The processaccording to claim 68, further comprising: determining that the stockmovement is neither upward nor downward; and selecting a trade pricebased on a current date.
 70. An automated exchange for trading afinancial instrument, wherein the trade may be one of a purchase of aquantity of the instrument and a sale of a quantity of the instrument,the exchange comprising: a book memory adapted to store a quotation forpurchasing or selling the financial instrument, the quotation having asize associated therewith; an interface adapted to receive an incomingorder for the purchase or sale of the instrument, the incoming orderbeing associated with one of a plurality of types of entities and havinga size associated therewith, wherein the types of entities includepublic customers, professionals, and market makers on other exchanges;and a processor including: a discriminator adapted to determine which ofthe plurality of types of entities the incoming order is associatedwith; a system memory adapted to store a set of preference quantities,the preference quantities being associated with respective ones of theplurality of entity types; and a trade matching process adapted toexecute the trade between a portion of the quotation and the incomingorder and wherein a size of the portion is based on the preferencequantity associated with the entity type determined by thediscriminator.
 71. The exchange according to claim 70, wherein one ormore of the preference quantities are an absolute quantity of theinstrument.
 72. The exchange according to claim 70, wherein one or moreof the preference quantities are a percentage of the size of thequotation.
 73. The exchange according to claim 70, wherein thepreference quantity is the lesser of an absolute quantity and apercentage of the size of the quotation.
 74. The exchange according toclaim 70, wherein the book memory is adapted to store a secondquotation, wherein the system memory is adapted to store a plurality ofsecond preference quantities, and wherein the trade matching processtrades the incoming order against the portion of the quotation and asecond portion of the second quotation, sizes of the portion and thesecond portion based on the respective preference quantity and secondpreference quantity.
 75. The exchange according to claim 70, wherein thepreference quantity is associated with the customer and wherein the sizeof the portion equals the size of the quotation.